Inflation, Hyperinflation, Deflation Explained By: Visionone Capital Management - - https://www.facebook.com/
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Inflation, In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
Inflation Causes & Effects Explained By: Money Wisers Group - FACEBOOK.COM/MONEYWISERS
Two major types of inflation can lead to an increase in the level of prices. In economics, we refer to these as the demand-pull effect and the cost-push effect.
Demand-Pull Effect
Demand-pull inflation happens when an economy experiences an increased demand for consumer goods. This is inflation driven by consumers. Supply and demand. As demand goes up, prices also go up because buyers are willing to pay more.
When wages go up — like when unemployment is low and employers need to
pay more to attract and retain workers — people have more money to spend
on stuff. Their demand increases. Companies raise prices to a level
consumers are willing to pay to keep supply and demand in balance.
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Cost-Push Effect
Cost-push inflation happens when prices go up because of a higher cost of production. This is inflation driven by producers.
Cost-push inflation usually happens when wages or the cost of raw
materials goes up. Prices increase because it costs companies more to produce goods.
This is another case of keeping supply and demand in balance.
When the cost of production goes up, supply goes down at current
prices because producers can’t make as much for the same amount of money. Prices increase to ensure producers can afford to keep up with demand.
Common causes of this kind of strong inflation include:
- Money Supply. An increase in the money supply —
that is, a government literally printing money — can provoke inflation
if it outpaces economic growth. When the
U.S. Federal Reserve (the Fed) puts money into circulation faster than the economy demands it, the value of a dollar goes down. Think of dollars in this case like collector’s items: The rarer they are, the more valuable.
National Debt. When the national debt is high in relation to how much income a country can generate (GDP) - , a government can either raise taxes or print more money to pay it off. Higher taxes mean higher costs for producers, which leads to higher prices. Printing more money increases the money supply and devalues the currency.
- Exchange Rates. In a global economy, the value of the U.S. dollar compared with international currencies affects prices in the U.S.. When the dollar is less valuable compared with a trade partner’s currency, imported goods cost more to U.S. consumers.
Each of these can happen regardless of consumers’ income. If wages don’t increase, but the money supply, national debt, or exchange rate drives prices up, U.S. consumers become less able to buy stuff, which can stall or slow economic growth.
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Effects of Inflation
Inflation affects the cost of any goods or services in an economy — including major purchases like homes and cars; consumer goods like food and televisions; personal services from construction to health care; and financial services like banking, loans, and credit cards.
Common effects of inflation include:
- Prices Rise. The most obvious effect of inflation is higher prices on everyday goods and services. That means a higher cost of living, but also generally higher wages.
- Interest Rates Go Up. To keep inflation from rising out of control, the Fed typically raises the market interest rate to increase the cost of borrowing money and keep from pumping too much money into consumers’ hands and spiking demand and prices.
- Debt Is Cheaper. If the inflation rate is greater than your interest rate on debt, you benefit by repaying the debt with less-valuable money. In countries that don’t manage interest rates as the U.S. does, debt becomes cheaper with inflation, which can accelerate inflation further.
- Saving Is Deterred. If the inflation rate is higher than the yield on a savings account or the return on investments, consumers are incentivized to spend now rather than save money that will lose purchasing power over time. Raising interest rates in the U.S. helps savings keep up with inflation to avoid this dilemma.
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