Inflation text book definition:
Inflation is an economic phenomenon characterized by a sustained increase in the general price level of goods and services in an economy over a period of time. This leads to a decrease in the purchasing power of money, as the same amount of currency buys fewer goods and services. Inflation is usually measured by consumer price index (CPI).
Inflation can be divided into different stages based on why prices are going up. Here are some of the main stages of inflation, explained in simpler terms:
- Demand-pull inflation: This happens when more people want to buy something than there is available, causing prices to go up.
- Cost-push inflation: This happens when the cost of making something goes up, causing the price to go up too.
- Structural inflation: This happens when the way the economy works changes, causing prices to go up in the long run.
- Monetary inflation: This happens when there is too much money in the economy, causing prices to go up.
- Hyperinflation: This is a extreme and fast increase in prices, when the value of money drops quickly. This is usually caused by too much money in the economy or a loss of trust in the currency.
- Creeping Inflation: Inflation rate under 2-3%. Countries like Macau, China, Oman and Hong Kong are best examples where the government is able to keep the inflation rate under 2%.
- Walking Inflation: Inflation rate between 3 to 8%. Countries like Japan, India, Saudi Arabia and Bhutan are able to manage under 8%.
- Galloping Inflation: Inflation rate over 10%. Countries like Germany, Italy, UK and Azerbaijan have inflation over 10%, which means cost of living over here is increasing at fast phase.
- Hyperinflation: This is extreme case of inflation when inflation rate is higher than 50%. This is really bad for country and people who are living in those countries. One of the saddest examples of hyperinflation occurred in Hungary in 1945, where the cost of goods and services doubled every mere 15 hours, causing immense suffering for the people and leading to a complete breakdown of the economy. This rapid and uncontrolled increase in prices resulted in a rapid loss of value for the currency, making it nearly impossible for people to afford basic necessities and leading to widespread poverty and hardship. Countries like Turkey, Sri Lanka, Argentina, Venezuela, Syria and Zimbabwe are currently suffering under Hyperinflation.
- Deflation: Inflation rate below 0%. Deflation is a persistent decrease in the general price level of goods and services in an economy over a period of time. Deflation occurs when the rate of inflation falls below zero, meaning that the average price level is declining. This can be caused by a variety of factors, including a decrease in demand for goods and services, an increase in the supply of goods and services, or a contraction in the money supply. Deflation can have a number of negative effects on an economy, as it can lead to decreased consumer spending, lower investment, and higher levels of unemployment. In severe cases, deflation can lead to a spiral of declining prices, lower economic activity, and further deflation, making it difficult for the economy to recover. South Sudan is the only country currently which is in Deflation state.
