What is inflation?
Inflation is one of the most used words in economic conversations. It is simply the rise in prices of goods and services. This can be of daily or commonly used items such as food, clothing, housing, recreation, transport, consumer staples, or even industrial goods. Inflation means the average price rise over time.
The opposite of inflation which is rare is called deflation (a fall in prices).
Inflation indicates a fall in purchasing power. For instance, one thousand naira note buys lesser amount of the same commodity over a period of time.
What Are The Effects of Inflation?
- The purchasing power of the currency falls as goods and services increases in price.
- When inflation is high, the cost of living gets higher as well, sometimes even beyond a reasonable level.
- Inflation ultimately hurts economic growth
- A certain level of inflation is required in the economy to promote expenditure, encourage the production of goods and services and discourage holding up money in savings.
As money generally losses its value over time it is important for people to invest money. Investing ensures economic growth of a country.
Who Measures and Controls Inflation?
County’s Central Banks measure inflation. In Nigeria, the Central Bank of Nigeria measures inflation. The CBN works to limit inflation through its monetary policy, the Government also influences inflation through its taxation and fiscal policy.
High taxes of agricultural products, taxes on petroleum and diesel or cloths can lead to rise in inflation.
What are The Main Causes of Inflation?
Some of the major reasons behind inflation or rise in prices are;
- High demand and low supply of goods: both create a demand supply gap which leads to hike in prices.
- Excess circulation of money: this leads to inflation as money loses its purchasing power. With people having more money they also tend to spend more which causes increased demand. For example, if more people want to buy tomatoes, then tomatoes prices will rise.
- Spurt in cost of production causes inflation: for example, soap and shampoo prices would increase if the chemicals used in making them become costlier. This is called cost push inflation.
Is Inflation Bad for Everyone?
Inflation may not always be bad. Economists believe that some inflation is necessary for economic growth. However, beyond a limit, inflation hurts both consumers and economic growth. Inflation also has an impact on the assets you hold, for someone with investments in real estate or stocked commodity, inflation means that the prices of such assets are set for a hike.
Those who possess cash may be adversely affected by inflation as the value of their cash erodes.
So Governments and Central Banks work towards controlling inflation in an ideal range.