What is Inflation? Definition & Meaning of Inflation

In its most basic sense, inflation involves the rate as to which the price of products and services rises within an economy. Often measured through Consumer Prices Index (CPI) and Retail Prices Index (RPI), it is used by businesses and the government in calculating what financial measures and economic policies to implement. For instance, banks consider inflation as a vital factor to determine their interest and mortgage rates as well.

Types of Inflation

Creeping Inflation – Considered as the mildest of all types, a creeping inflation involves increases in prices at a rate of 3% or less annually. Normally, it can induce economic expansion rather than destabilisation. Consumers, wanting to save more and avoid further price increment, will slightly increase their demand for certain products and services.

Walking Inflation – Contrary to the previous type, a walking inflation can be more harmful and induce serious backlashes. With the annual inflation rate pegged at 3% to 10%, economic activity happens to fast and demand will significantly rise due to the fear of consumers. It’s most likely that producers and even wages will not be able to keep up, making the cost of living unreachable for most.

Galloping Inflation – With its effects even worse than that of walking inflation, this type involves an annual rise in prices in a rate greater than 10%. It causes great instability and chaos within the economy, with damages extending to both common citizens and the credibility of government officials. A country suffering from galloping inflation is at risk of losing foreign investors who would rather withdraw their capital than take un calculated risks.

Hyperinflation – Although it is rare for hyperinflation to occur, price increment can reach 50% or higher. The most common example is when Germany hastily printed too much money in order to pay and cover the expenses involved in warfare.

Common Causes of Inflation

Wage increases – Employees’ salary is one of the major expenses of a producer, thus constant increases of such will force them to pass on the cost to consumers. Due to a higher purchasing power, common people will also have the tendency to sharply increase their demand for products and services, further making it difficult for producers to keep up.

Depreciation – This happens when a country’s currency loses value in comparison with that of others. As an effect, they will have to pay more than usual for imported products. This is considerably harmful for economies that greatly depend on imports, since the lack of local alternatives will inevitably increase the risk of inflation.

Prices of raw materials – With the increase of the prices of raw materials from which actual products and services come from, inflation is more likely to happen. For instance, the rise of the value of oil can amplify the value of food, electricity, and other common goods as well.

Excessive printing of money – It is expected for a country to experience inflation if its central bank recklessly produces more money that what is currently needed. The supply of money circulating within an economy is a factor when determining prices, and excessive increase of such supply can lead to the rise of products and services’ price.