Inflation Cause, Effects and Remedies

11327 words 46 pages
Inflation
It’s causes, effect and remedies.
By: Subrat Choudhury

Inflation and Deflation
I
INTRODUCTION
Inflation and Deflation, in economics, terms used to describe, respectively, a decline or an increase in the value of money, in relation to the goods and services it will buy. Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available
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Several other industrial nations suffered a similar acceleration of price increases, but some countries, such as West Germany (now part of the united Federal Republic of Germany), avoided chronic inflation. Given the integrated status of most nations in the world economy, these disparate results reflected the relative effectiveness of national economic policies. This unfavorable inflationary trend was reversed in most industrial nations during the mid1980s. Austere government fiscal and monetary policies begun in the early part of the decade combined with sharp declines in world oil and commodity prices to return the average inflation rate to about 4 percent.

Measures

Annual inflation rates in the United States from 1666 to 2004. Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index.[26] The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer".[4] The inflation rate is the percentage rate of change of a price index over time. For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007. [27]

3

Other widely used price

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