Inflation Rate
Inflation rate is an economic measure that gauges the pace at which the prices of goods and services rise in an economy. It is calculated as the percentage change in the average price of certain commodities and services over a certain period of time. The cost of these commodities and services is compared to prices of an earlier period, to tabulate the inflation rate of the economy. Governments, businesses and investors use the inflation rate to measure the value of a currency. Higher inflation rate leads to depreciation in the value of a currency and losing purchasing power.
The causes of inflation are numerous including the state of the currency in the market, increase in production cost amongst other factors. Increase in currency encourages people to buy more. More money in circulation enforces sellers to raise the prices of their wares which in turn increases inflation. Similarly, when the incomes of people rise, they tend to buy more and more luxuries. This increased demand in turn increases the prices and inflation. Inflation also rises when raw material costs such as food, labor, fuel and other prime commodities increase. When the availability of products decrease due to natural disasters or war, it also causes increase in the prices which ultimately leads to inflation.
Governments use various methods to control inflation. Monetary policies such as changing interest rates, implementing taxes, increasing the value of a currency and increasing the supply of money can have a direct effect on inflation. Governments also introduce fiscal policies such as increasing public investment, providing loan to businesses and controlling prices of products.
Inflation rate should be kept in check in order to ensure a healthy economic system. The ideal inflation rate is 2-3%. This rate allows the purchasing power to remain constant and discourages deflation. When the rate of inflation rises above normal, the government must take steps to reduce it in order to avoid economic instability. High inflation rate causes the cost of living to rise which makes life difficult for the consumer.
Inflation rate is an important economic indicator and it influences various aspects of the economy. Businesses use inflation rate to forecast the future demand of their products. A high inflation rate discourages businesses from investing as the risk of depreciation of their returns is high. Similarly investors tend to avoid investing in a country where the inflation rate is high. Investors also measure the rate of return on their investments by comparing them to the inflation rate of a country.
Inflation rate is a complex phenomenon and its effects on an economy depend on various factors. The ideal inflation rate is 2-3%, as it keeps the economy of a nation stable. Governments should use effective methods to control the inflation rate in order to ensure economic stability and prevent economic crises.
