It is general increase in price of goods and services over a certain period of time. When the general price of goods and services rises, each units of currency buys fewer goods and services. Consequently, inflation reduces the purchasing power because value of currency is depreciated. Inflation is categorized into three types, cost push inflation, demand pull inflation and built in inflation.
- Cost push Inflation – it is increase in cost of production process. It include increase in price of raw material or increase in wages of labor and services lead to high manufacturing cost. This lead to high cost for finished product which contribute to inflation.
- Demand pull inflation – this type of inflation occur when demand of goods and services increases more rapidly than production capacity. Thus it creates demand supply gap which result in higher prices. For example, when oil supplying nations cut down the production of oil, the supply reduces, which lead to high demand of oil and increase in prices subsequently and inflation.
- Built-in Inflation – it links to adaptive expectations. As the price of goods and services increases in an economy, the purchasing power decreases due to falling of currency value. Thus due to rise in price labor expect and demand more wages to maintain their cost of living. The increased wages results in more increase in price of goods and services which lead to further inflation.
Inflation has both good and bad impact usually depending on the viewpoint of the people. People with tangible assets like stock commodities or property may like inflation because it raises the worth of their assets. While people holding cash may dislike inflation because it erodes the value of their cash holdings.