Inflation

Definition

In economics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.

Inflation expands the wealth of the asset owners while it reduces the net consumption of the poor as the prices of goods and services go up. If a poor wants to maintain the same level of food consumption, it reduces his or her other consumption, including health, education and investment.

Sources of Inflation:

The factors that affect the movement of the prices upward in Bangladesh include:

1. Increased prices of inputs
2. Upward price movements in the country of origin
3. Anticipated upward pressure on prices of gas, fuel and power
4. Undervalued exchange rate
5. Continuous pile-up of remittances vis-à-vis decreasing import
6. Increased non-development expenditure
7. Lack of prudential management of liquidity

Causes of Inflation

The causes of inflation can be grouped into two groups: -

One is increase in demand, which is due to

1. Increase in Purchasing Capacity of Consumer
2. Increase in money supply 
3. Interest Rate on Loan given to the Manufacturer by the Banks

4. Increase in disposable incomes
5. Increase in community’s aggregate spending on consumptions and investment goods 
6. Increasing Black Marketing 
7.  Increasing Demand 
8.   Increase in foreign demand and hence exports 
9.  Increase in salaries wages or dearness allowance and 
10.  Increase in population 
11.  Interest Rate on Saving 
12.  Excessive speculative and tendency to hoarding and profiteering on the part of producers and traders

Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that’s universally agreed upon, but at least two theories are generally accepted. There are three major types of inflation, as part of what Robert J. Gordon calls the “triangle model”

Types of Inflation

There are three main types of inflation:

1.      Demand-pull inflation

2.      Cost-push inflation

3.      Hyperinflation

v Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favorable market conditions will stimulate investment and expansion.

vCost-push inflation, also called “supply shock inflation,” is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs.

For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.

vBuilt-in inflation is induced by adaptive expectations, and is often linked to the “price/wage spiral”. It involves workers trying to keep their wages up with prices and firms passing these higher labor costs on to their customers as higher prices, leading to a ‘vicious circle’. Built-in inflation reflects events in the past, and so might be seen as hangover inflation.