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Inflation is defined as a sustained increase in the
price level or a fall in the value of money.
When the level of currency of a country exceeds
the level of production, inflation occurs.
Value of money depreciates with the occurrence
Creeping or mild inflation is when prices rise
3% a year or less. That's because this mild
inflation sets expectations that prices will
continue to rise. As a result, it sparks
increased demand as consumers decide to
buy now before prices rise in the future.
This type of strong, or pernicious, inflation is
between 3-10% a year. People start to buy
more than they need, just to avoid tomorrow's
much higher prices. This drives demand even
further, so that suppliers can't keep up. More
important, neither can wages. As a result,
common goods and services are priced out of
the reach of most people.
When inflation rises to 10% or greater, it
wreaks absolute havoc on the economy.
Money loses value so fast that business and
employee income can't keep up with costs and
Hyperinflation is when the prices skyrocket
more than 50% - a month. It is fortunately
very rare. In fact, most examples of
hyperinflation have occurred when the
government printed money recklessly to pay
for war. Examples of hyperinflation include
Germany in the 1920s, Zimbabwe in the
2000s, and during the American Civil War.
Stagflation is just like its name says: when economic
growth is stagnant, but there still is price inflation. Why
would prices go up when there isn't enough demand
to stoke economic growth? It happened in the 1970s
when the U.S. went off the gold standard. Once the
dollar's value was no longer tied to gold, the number
of dollars in circulation skyrocketed. This increase in
the money supply was one of the causes of inflation.
The core inflation rate measures rising prices
in everything except food and energy. That's
because gas prices tend to escalate every
summer, usually driving up the price of food
and often anything else that has large
Wage inflation is when workers' pay rises faster than
the cost of living. This occurs when there is a
shortage of workers, when labor unions negotiate
ever-higher wages, or when workers effectively
control their own pay. Of course, everyone thinks
their wage increases are justified. However, higher
wages can cause prices of the company's goods and
services to rise.
Demand Pull Inflation
This occurs when Aggregate demand (AD) increases at a
faster rate than Aggregate Supply (AS). Demand pull
inflation will typically occur when the economy is growing
faster than the long run trend rate of growth. If demand
exceeds supply, firms will respond by pushing up prices.
Cost Push Inflation
This occurs when there is an increase in the cost of
production for firms causing aggregate supply to shift to the
left. Cost push inflation could be caused by rising energy and