The term inflation refers to a yearly increase in the cost of all goods and services within an economy. When the price of utility increases, using the same amount of money, citizens can buy fewer goods as of earlier.
There is an opposite of inflation, too, called deflation. Deflation means a decrease in the cost of general goods and services.
The inflation rate refers to the yearly percentage change in the regulated price index. It gives the calculated idea about inflation.
Prices do not always increase or decrease at the same rate. Therefore, goods prices are assigned a rep value for solving the index number problem. A consumer price index is for this reason. If there is a change in goods prices and regular wages, there becomes a change in the minimum standard of living.
The dominant factors of inflation are; an increase in the supply of money and a significant increase in the speed of money.
If the speed of money were neutral, inflation would not affect the economy.
But, such neutrality is not possible in the real world. The effects of inflation on the economy can be disruptive. Moderate inflation can also have some positives on the economy.
The effects of inflation are; an increase in the cost of keeping money and unpredictable future inflations discourage financial investment. If inflation is rapid, it may lead to a shortage of goods purchasable for consumers, as they will not keep up with the increased prices.
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