Inflation can be described as a hike in the usual price level. At the time of Inflation, pricing of various goods and services like food, housing, transportation, apparel, and fuel rise and affects the whole economy of a country. If prices only a few types’ goods and services are increasing, then it’s not considered as Inflation. To know more about Inflation, it is necessary to discuss the causes or parameters that contribute a hike in Inflation, which are:
Causes of Inflation
Economists differentiate between two types of inflation: Demand-Pull Inflation and Cost-Push Inflation. These are actually causes of Inflation which develop and enhance Inflation by causing an increase in pricing.
Demand-pull inflation generates when the average demand of goods and services increase really fast in comparison to the economy’s capacity. One major bend in demand may come from a central bank which quickly increases the supply of money. Due to this increase in money, demand increases even more. Some small businesses and industries cannot start increasing the production, keeping supply constant. Thus, price starts to increase and thus causes Inflation.
Cost-push inflation generates when the product pricing increases. A hike in raw materials’ price and an increase in salary/wage, causes inflation. An increase in product pricing leads to decrease in average supply and in turn whole pricing level also increases.
Parameters that boost up the Inflation
A. Consumers’ Tendency
As soon as employment reduces and salaries, as well as wages, remain unchanged, consumers are more likely to expense money. Due to this increases spending tendency of consumers, manufacturers and sellers increase the pricing of their goods & services, which are higher on demand. Thus, consumers’ expenditure tendency may prove to be a considerable parameter to increase the inflation.
B. Downturn in Supply
Inflation gets affected by changes in supply and demand. As soon as the supply of a particular good or service reduces, it’s demand increases because a major part of the population wants to own it while it doesn’t be available on that large scale. There may be two major reasons for supply to be decreased. For the first, a super famous and worthy product’s supply may reduce due to its higher demand. Such goods get sold before the new stock comes. Another one and the biggest reason of supply to be decreased is a natural disaster or any environmental effect. For example, we can consider that excessive storm diminishes manufacturing units by which supply-chain gets disturbed.
C. Businesses’ Movements
Other than the above parameters, inflation can be given a push by corporate industries or businesses also. Some business owners introduce a hike in the pricing of their products because they know that consumers are willing to pay the increased amount to own their product. Another reason to increase pricing may be when they are introducing a product which consumers will be using on daily basis and will be needing that for sure. Unintentionally, such acts of business leaders may cause inflation and if these things aren’t stopped then inflation keeps on increasing.
How is it measured?
Measuring inflation is a complicated procedure while considered from the side of expert government statisticians. To kick start, all the related goods and services are put in a fundamental base that is called as a market basket. The cost of this market basket is finally measured at different time intervals and compared. The result is calculated in terms of price index i.e. present cost of basket compared with the cost of a basket at the starting of the year.
Consumer Price Index (CPI): CPI gives an approximate measure of changes in pricing of goods and services used by consumers i.e. clothes, food, and vehicles. The result calculated via CPI provides a measure of the price being seen from buyers’ side.
Producer Price Indexes (PPI): PPI is a combination of indices that provides an aggregate change in selling price of various goods and services with time. The result calculated via PPI provides a measure of a price being seen from sellers’ side. While being measured for a long-term, different PPIs and CPI indicate an equal rate of inflation. Being calculated for short-term, economists and investors prefer CPI more than PPI.