What causes inflation Essay Example | Topics and Well Written Essays - 1500 words

What causes inflation - Essay Example It will also look at some of the ways that an individual is able to calculate the inflation rate in an economy. However, the paper will not only focus on the negative side of matters and in conclusion it will also determine what solutions have been brought about on how the economy can avoid such a situation. Introduction Inflation can be described as the increase in the price level of various services and goods within an economy that takes place over a period of time. It should be noted that this increase happens in all sectors of the market meaning that almost goods and services suffer as a result and those in the economy end with a rising expenditure for the same things that they used to buy before (Taylor 89). It may not be very noticeable at first as it is a gradual process and prices do not sky rocket on the first day meaning that many individuals are usually caught off their guard by the situation leading to a financial panic as they realize just what exactly is going on. As a result of inflation, money also loses a fair amount of purchasing power meaning that an individual is able to buy less with a certain amount that before was adequate for his expenditure needs (Svensson 148). Loss of purchasing power of a currency is not good for the economy as this serves to lower the value of a currency as a whole in the end. It is due to this fact that individuals and institutions struggle against any signs of inflation in a bid to avoid from taking place and stopping it in its tracks as early as possible, the sooner the better (Taylor 101). Though inflation is viewed mostly as a negative impact on the economy, it should be noted that there are both positive and negative effects that are associated with this occurrence. Measures of Inflation One is able to identify the onset of inflation in an economy by measuring the inflation rate of that economy. Though there are a number of other ways in which measuring can be done, this is the main method that is used by econ omists on a global scale. Measuring the inflation rate is done by taking note of the yearly change in percentage terms of a price index over a period of time (Abel & Bernanke 93). The price index that is mostly used for these purposes is the consumer index though other can be used as well. The consumer price index is determined by measuring the prices of a selection of various goods and services that are usually bought by the average consumer and include items that may be needed on a daily basis such as foodstuffs and other supplies (Baumol & Blinder 25). High end items are not included in this collection of goods and services as they are first o f all not bought by the typical consumer and second of all not purchased on a regular basis thus they would reflect dishonestly on the final figure that is obtained in the end. Apart from the consumer price index, other indices that are also used to obtain the level of inflation in an economy also include the producer price index. This inde x concentrates on the producers rather than the consumers and determines the amount of money that domestic producers receive for their products over time determining the changes calculated in percentage in the process (Abel & Bernanke 98). The difference between this and the Consumer Price Index is mainly due to issues such as taxes and the intention of profit that will make the