This article presents the meaning and key features of inflation.
The situation of the continuous, sustained, and rapid increase in prices of almost all goods and services is known as inflation. It means inflation is a continuous, sustained, and rapid increase in the general price level of the economy which is generally measured by the consumer price index. Inflation diminishes the value of money or reduces the purchasing power of money or consumers. The thing to consider is that inflation is a state of continuous and noticeable rise in the general or average prices of all or certain baskets of commodities but not that of a single commodity.
Thus, inflation is a rise in the overall price level, a fall in the purchasing power of money, and an increase in the volume of money in the economy. Inflation generally occurs when the volume of money in circulation exceeds its demand or if the volume of money in circulation is higher than the volume of goods and services. In the case of excess purchasing power in the hand of people, it leads to a persistent rise in aggregate demand for goods and services. If a such rise in aggregate demand is not followed by the production and supply of goods and services inflation occurs. Similarly, the price level may go up because of an increase in the cost of production and thereby the inability to chase existing aggregate demand for goods and services by existing aggregate supply.
Features of Inflation
Based on the meaning of inflation, its key features are listed below (Meaning and Features of Inflation)
- Inflation is all the time associated with a rise in the price level. Thus, it is a process of uninterrupted increases in prices.
- Inflation is a monetary phenomenon and it is generally caused by an excessive money supply
- Inflation is essentially an economic phenomenon as it originates in the economic system and is the result of the action and interaction of economic forces
- It is a dynamic process observed over a long period.
- Inflation is a steady and sustained rise in the general price level
- Inflation is an upsurge in the general price level not a surge in specific prices.
- Throughout inflation, the supply of goods and services is fewer in comparison to their demand. It means total demand is higher than total supply.
- Inflation leads to a reduction in the value of money and as a result, money buys less. Thus, it reduces the standard of living over time.
- Inflation is characteristically a comprehensive measure, such as an increase in overall price or an increase in the cost of living in a country. But it can also be counted more narrowly for certain goods, such as food or services such as haircuts, and non-food goods and services.
- Inflation in the real sense is a post-full employment phenomenon
Inflation is an economic term related to a steady rise in the general price level and emerges in all the forms and statuses of the economies. It is necessary up to a certain level and once it goes beyond the required level it causes negative consequences in the economy. During inflation, the quantity of money is generally higher than its demand, and it is also caused by an increase in production costs.