6 Things you should know about Inflation
by Gabriella ellis
1. What is Inflation? -Inflation is a sustained increase in the general price of goods and services in an economy over a period of time. When the price rises, each unit of currency buys fewer goods and services.
2. How does Inflation affect you?- It's a rise in prices for goods which in turn makes people have to spend more on a product or service as well as more on the sales tax.
3. What causes Inflation?- There are two types of inflation. There is demand-pull inflation and cost-push inflation. Both types of inflation cause an increase in the overall price level within an economy. Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy's productive capacity.
4. Why is Inflation important?- Income streams must be discounted by inflation to determine how much value today' money will have in the future. This benefits stock investors. Inflation, whether real or anticipated, is what help motivates people to take on the increased risk of investing in the stock market, in the hope of generating the highest real rates of return.
5. What else does Inflation affect? Inflation tends to discourage investment and long term economic growth. This is because of the uncertainty and confusion that is more likely to occur during periods of high inflation. Low inflation is said to encourage greater stability and encourage firms to take risks and invest.
6. How is inflation positive? At times of very low inflation the economy may be stuck in a recession. Targeting a higher rate of inflation can help boost economic growth. This view is controversial. Not all economists would support targeting a higher inflation rate. However, some would target higher inflation, if the economy was stuck in a prolonged recession.