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What is inflation and what causes it?

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What is inflation?

Inflation is a process of continuous increase in the price of most goods and services in a country. This does not necessarily mean that all prices increase. There are some goods, like computers, which have actually dropped in price. Inflation can therefore be described as persistent general; increase in prices. Inflation is usually given as the percentage increase in overall prices over a year.

How do we measure inflation?

Defining a basket of goods and services used by a “typical” customer and then keeping track of the cost of the basket, is the measure of inflation. In the twelve months up to January 2007, the cost of the basket rose by 10% (as an example). This increase of 10% in the so called consumer price index (CPI) is referred to as the inflation rate. The CPI is the average spending or living costs of a person.

What causes inflation?

Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid);

Cost-push inflation – higher oil prices feeding through into higher costs;

Devaluation – increasing cost of imported goods, also boost to domestic demand;

Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more;

Expectations of inflation – causes workers to demand wage increases and firms to push up prices.

China’s consumer prices rose 1.8 percent year-on-year in December of 2017, after a 1.7 percent rise in November but slightly below market consensus of a 1.9 percent gain. Cost of non-food continued to increase, while cost of food fell much less. Inflation Rate in China averaged 5.29 percent from 1986 until 2017, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.

The producer price index increased by 4.9 percent from a year earlier in December of 2017, compared to a 5.8 percent rise in the prior month while markets estimated a 4.8 percent gain. It was the 16th straight month of rise in producer prices but the least since November 2016. Cost rose less for means of production (6.4 percent from 7.5 percent in November, namely extraction: 9.1 percent, raw materials: 8.1 percent and processing: 5.5 percent).

Also, prices rose at softer pace for consumer goods (0.5 percent from 0.6 percent, namely food production: 0.2 percent, clothing: 0.6 percent and daily use goods: 1.6 percent). At the same time, prices of consumer durable goods declined by 0.2 percent (after a flat reading in the prior five months). On a monthly basis, producer prices rose 0.8 percent, compared to a 0.5 percent gain in November.

Afghanistan Inflation Rate

The inflation rate in Afghanistan was recorded at 3.10 percent in November of 2017. Inflation Rate in Afghanistan averaged 4.15 percent from 2005 until 2017, reaching an all time high of 13.97 percent in April of 2011 and a record low of -18.39 percent in May of 2009.In Afghanistan, the Consumer Price Index (CPI) is divided into two main groups: Food Items, accounting for 61.3 percent of total CPI and Non-Food Items making up the remaining 38.7 percent. The most important food items are: bread and cereals (28 percent), meat (6 percent), milk, cheese and eggs (5.6 percent) and oil and fats (5.3 percent). The non-food items are mainly composed of: housing (17.2 percent), clothing (7.2 percent), household goods (7 percent), transportation (2.3 percent), and health (2 percent).

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GradesFixer. (2019). What is inflation and what causes it? Retrived from https://gradesfixer.com/free-essay-examples/what-is-inflation-and-what-causes-it/
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GradesFixer, 2019. What is inflation and what causes it? [online] Available at: <https://gradesfixer.com/free-essay-examples/what-is-inflation-and-what-causes-it/> [Accessed 11 July 2020].
GradesFixer. What is inflation and what causes it? [Internet]. GradesFixer; 2019 [cited 2019 February 11]. Available from: https://gradesfixer.com/free-essay-examples/what-is-inflation-and-what-causes-it/
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