Inflation

In the third millennium man is defeated in the phase of cost inflation. because of the cost inflation it is difficult to get better health care and the standard of living has diminished.

Inflation is a  increase in the general price level of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services;initially inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation.Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing the real burden of public and private debt, keeping nominal interest rates above zero so that central banks can adjust interest rates to stabilize the economy, and reducing unemployment due to nominal wage rigidity.Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.Inflation may also lead to an invisible tax in which the value of currency is lowered in contrast with its actual reserve ultimately, leading individuals to hold devalued legal tender.Today, most economists favor a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Causes 

There are three  main causes of inflation. The first, demand-pull inflation, occurs when demand outstrips supply. The second is cost-push inflation, which is when the supply of goods or services is restricted, while demand stays the same. The third, over expansion of the nation's money supply, is when too much capital chases too few goods and services. It's caused by too-expansive fiscal or monetary policy, creating too much liquidity.Deflation is usually caused by a drop in demand. Fewer shoppers mean businesses have to lower prices, which can turn into a bidding war.It's also caused by technology changes, such more efficient computer chips. Deflation can also be caused by exchange rates. For example, China keeps its currency's value low compared to the U.S. dollar. That allows it to under price U.S. manufacturers, lowering prices on its exports to the United States

Effects of inflation

(1) Debtors and Creditors:During periods of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the same amount of money, but they pay less in terms of goods and services. This is because the value of money is less than when they borrowed the money. Thus the burden of the debt is reduced and debtors gain.On the other hand, creditors lose. Although they get back the same amount of money which they lent, they receive less in real terms because the value of money falls. Thus inflation brings about a redistribution of real wealth in favor of debtors at the cost of creditors.

(2) Salaried Persons:Salaried workers such as clerks, teachers, and other white collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising.

(3) Wage Earners:Wage earners may gain or lose depending upon the speed with which their wages adjust to rising prices. If their unions are strong, they may get their wages linked to the cost of living index. In this way, they may be able to protect themselves from the bad effects of inflation.But the problem is that there is often a time lag between the raising of wages by employees and the rise in prices. So workers lose because by the time wages are raised, the cost of living index may have increased further. But where the unions have entered into contractual wages for a fixed period, the workers lose when prices continue to rise during the period of contract. On the whole, the wage earners are in the same position as the white collar persons.

(4) Fixed Income Group:The recipients of transfer payments such as pensions, unemployment insurance, social security, etc. and recipients of interest and rent live on fixed incomes. Pensioners get fixed pensions. Similarly the renter class consisting of interest and rent receivers get fixed payments.The same is the case with the holders of fixed interest bearing securities, debentures and deposits. All such persons lose because they receive fixed payments, while the value of money continues to fall with rising prices.Among these groups, the recipients of transfer payments belong to the lower income group and the renter class to the upper income group. Inflation redistributes income from these two groups toward the middle income group comprising traders and businessmen.

(5) Equity Holders or Investors:Persons who hold shares or stocks of companies gain during inflation. For when prices are rising, business activities expand which increase profits of companies. As profits increase, dividends on equities also increase at a faster rate than prices. But those who invest in debentures, securities, bonds, etc. which carry a fixed interest rate lose during inflation because they receive a fixed sum while the purchasing power is falling