From renting a house, purchasing a car, investing in the stock market and beyond, inflation plays a crucial role for traders and consumers. One of the renowned indicators of inflation is the current price index (CPI).
Well! If you want to know CPI, you should be familiar with inflation first, so let me be precise.
The gradual growth in the value of goods and services is known as inflation. Your purchasing power decreases due to inflation, which means that a dollar spent now will be worth less in the future. According to Dean Baker (senior economist of the Center for Economic and Policy Research), "the plain reality is that there is too much money chasing too few goods and services".
The Consumer Price Index (CPI) (which is defined as the percentage change in the price of goods and services) is used by the US Bureau of Labor Statistics (BLS) to calculate the inflation rate, and this information is released each month.
Now the question is- What are the main causes of inflation? So many experts did meticulous research about it and dig out the answers which we will learn in a minute.
Causes of inflation
Demand-pull Inflation
When the amount of credit and money available to consumers increases more quickly than the economy's ability to provide those things, demand-pull inflation results. In layman’s words, a raise in demand leads to an increase in prices.
Since individuals have more money, it leads to more positive sentiments. Consequently, more money is spent leading to a raise in the prices. Higher demand and a less adaptable supply lead to a demand-supply mismatch, which increases the prices the goods and services.
Cost-push inflation
Cost-push inflation is a result of increased prices of production inputs which are used in manufacturing. Costs for all types of intermediate products increase as more money and credit are directed toward the commodities or other asset markets. This is particularly clear whenever there is a bad economic phase, it will affect the supply of imported goods.
These changes drive up the price of the final goods or services, which in turn drives up consumer pricing. For instance, an increase in spending money will lead to a speculative boom in oil prices. This implies that the price of energy may increase and affect consumer prices, which will be reflected in various inflation measures.
Built-in inflation
Adaptive expectations or the notion that individuals anticipate present inflation rates to persist in the future are connected to built-in inflation. People may anticipate an ongoing increase at a similar pace in the future as the price of products and services grows. Therefore workers may request higher expenses or wages in order to maintain their level of living. The cost of products and services rises as a result of their increased earnings, and this wage-price spiral keeps going as one element drives the other and vice versa.
Bottom line!
According to experts, too much inflation is not good for the economy, nonetheless too low is also considered as bad because it causes a decline in the currency of the nation. And, this blog post is enough to provide a good understanding of the major reasons which decide the rate of inflation.