Inflation

Inflation is, by definition, a raise in the average price levels as calculated by the Consumer Price Index. It is a continuous rise in prices over a period of time. A continuous period is considered as at a minimum of several months or more than a year’s time. If prices were to jump up by 10 percent that would not deemed inflation by economists. However, if there was a 1 percent rise in prices, as per the Consumer Price Index, over the course of a year that would be considered inflation.

If inflation makes an economy stall it has the potential to cause severe economic problems as well as social problems. Consumers will not be able to keep up with the rising prices and business will not be able to afford to pay higher wages or hire more employees or purchase additional equipment to boost productivity. Inflation reduces the value of savings. In addition to harmful economic effects, inflation has the ability to cause harmful social effects. The harmful social effects are from the “income redistribution effects” of inflation. Over the course of an inflation period, the country itself does not have loss in its total income. However, what happens is that certain individuals in the economy gain an unequal share of the income.

Inflation has potential to create financial problems for average households. Presume the overall price level increased by 5% during the past 12 months.  If a "typical urban household" spent $3,000.00 during the first month for all household expenses, then they must budget $3,150.00 during the last month for the exact same quantity of goods and services. Prices of individual items may have increased at different rates and some prices may have even declined, but overall they must budget about $150 more per month now. If their income after taxes does not increase by that amount, they must save less, substitute less expensive items, forgo some items, or incur debt. (GetObjects)

One of the biggest events in price history is inflation. By studying past...