Inflation - Concept, Causes & Control Measures

Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.

- S B Karimullah Sahib

1. Concept

Inflation measures the average price change in a basket of commodities and services over time. It is indicative of the decrease in the purchasing power of a unit of a country's currency. This is measured in percentage.

Sudden rise of prices is not inflation. It is called as price rise. If it happens more often, then it is called as inflation. Inflation is proof of growth. When unchecked, this becomes expensive, purchasing power of money gets reduced. It affects the poor most, because major portion of their earnings goes to meet inflation. Inflation pushes interest rates up, dampens investment and leads to depreciation of currency.

Economists categorized three separate factors that cause a rise or fall in the price of goods:

A change in the value or production costs of the commodity,

A change in the value of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and

Currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency.

2. Effects of Inflation

The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth.

3. Types of inflation

Creeping inflation: It is a condition where the inflation in a country increases slowly but continuously over a period of time and the effect of inflation is noticed after a long period of time. It is a general price increase say up to 4% a year. It reduces the purchasing power, but this type of inflation is manageable.