Inflation is one of the most important concepts in economics. It’s also one of the simplest. It’s just the average rate that prices are rising. A small amount of inflation is healthy for an economy – but how is it calculated and what happens when it gets out of control?
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Inflation is a term commonly thrown around in conversations about the economy, but what exactly is it? In the simplest terms, inflation refers to the sustained increase in the overall price level of goods and services in an economy over time. This means that as time goes by, prices tend to rise, and the purchasing power of money decreases.
To better understand this concept, imagine you go to the grocery store today and buy a loaf of bread for $2. If inflation is at 2%, a year from now, that same loaf of bread will most likely cost you $2.04, assuming no other factors impact the price. This gradual rise in prices is what we call inflation.
Inflation occurs due to a variety of factors, but one of the main drivers is the supply and demand dynamics of an economy. When the demand for goods and services exceeds the supply, it creates a situation called demand-pull inflation. This occurs when consumers are willing to pay higher prices for goods and services, prompting businesses to raise their prices to maximize profit.
Another factor that contributes to inflation is cost-push inflation. This happens when the cost of production for businesses increases, thus resulting in higher prices for consumers. For instance, if the cost of materials or labor rises, businesses may choose to pass on these additional costs to the customers through increased prices.
Inflation can impact individuals and businesses in several ways. One of the most immediate effects is the decrease in purchasing power. As prices increase, the same amount of money can buy fewer goods and services, leading to a decline in the standard of living for consumers. This is particularly problematic if wages do not keep pace with inflation, as it means individuals have less money to spend.
Additionally, inflation can create uncertainty and make financial planning difficult. When prices are constantly rising, individuals may hesitate to make long-term investments or even save money, as they do not know what the future purchasing power of their savings will be. Furthermore, inflation erodes the value of fixed-income investments, such as bonds or savings accounts, making it harder to grow wealth over time.
However, it is important to note that some level of inflation is considered healthy for an economy. Moderate inflation encourages spending and investment, as individuals are motivated to put their money to work rather than let it lose value over time. Moreover, it allows the central banks to enact monetary policies, such as lowering interest rates, to stimulate economic growth during times of recession.
Central banks, like the Federal Reserve in the United States, play a crucial role in managing inflation. Their primary tool is monetary policy, which involves adjusting interest rates and controlling the money supply. By increasing interest rates, central banks aim to reduce borrowing and spending, which can help curb inflation. Conversely, lowering interest rates is a common tactic used to encourage borrowing and spending to stimulate economic activity during times of low inflation or recession.
In conclusion, inflation refers to the sustained increase in the overall price level of goods and services over time in an economy. It impacts individuals by reducing purchasing power, making financial planning challenging, and eroding the value of fixed-income investments. However, some level of inflation is considered necessary for a healthy economy, and central banks play a crucial role in managing and controlling inflation through monetary policy.
Zimbabwe, the country with the most trillionaires
I cant believe ppl believe this garbage. Inflation is caused by a private corporation [federal reserve] that keeps printing notes that are worth nothing and backed by nothing. If our money was still backed by gold and silver they couldn't just keep printing it unless the gold was there to back it. I can buy today with a silver oz the same as you could buy with a silver oz 75 years ago. Let's get back to real money and end these corrupt bankers.
Its time to get a 2nd wife and get her working too
My little one he’s only 4 can explain economics to you so that’s not what we need instead we need to stop buying anything that’s gone up in price so these thieving companies can inevitably go into administration
The year 2023 is set to be a pivotal year for the cryptocurrency market with any predicting that the industry is on the CUSP of a bull run. the market cycle actually has not met its balance,
we continue onward round around and around while hanging tight for the tremendous victory on a colossal…..
3.99 for a big Mac!! Wow
ok, that explained nothing.
Millions of shares ready for the taking when the recession hits?
A now it cost 10.99
I hate AP
I've been unsure about the market due to volatility, at the same time I still feel it's the right time to make profit cos of the price decrease, heard someone speaking of making over $500k since the lockdown and I'm driven to ask what techniques/skillset is needed to achieve this
Hmmmm……………Even simpler. Inflation of too much money following too few goods.
We need price control to curve inflation. Since they are not the ones who raise prices, poor people do not cause inflation. Let those who cause inflation and can afford it shoulder its cost.
This is not understandable to an ordinary man.
One thing stood out for me from this video: "If your income isn't keeping up with prices, you're getting poorer."
Dang it, i'd soon be broke.
But is inflation needed? Why can't we just keep the currency at the same value? And why does it only happen to money? For example, the same wouldn't happen if we used gold as a currency instead.
Is inflation a ploy that the government uses so people don't get rich off of savings?
Inflation is simply the government printing too much money chasing too few goods. Inflation is all the government's fault, not greedy corporations price gouging as the media lies about. Inflation is theft. It steals your purchasing power so you must work more just to stay even let alone try and get ahead.
Who else watch this vid for Ms.Taylor class
hi there, I'd like to ask for permission on 'taking' or borrowing your footages to be included in my educational-purposed video that would be one of the economics class assignment. I will surely insert The Guardian in the credits. thanks! 🙂
it's nice. it gives a basic view. short and sweet I would say.
A rise in prices DOES NOT equal inflation…at least not in and of itself. In a market economy, supply and demand determine the value or price of something. Either of these two factors will raise or lower the price. This is NOT inflation. Inflation is something else and this video does not address it. Inflation is the ratio of money supply to the gross national income. The Federal Reserve Bank can and does regulate the supply of money by printing more or less of it and this is the factor that causes inflation, deflation or stability in prices. Economic policies determine the goals desired by the Fed and thus the money supply is manipulated to achieve the desired effect.
Showing condoms for examples!
Did not understand anything madam….can u explain it more simply??
A good one.
I request you to if you could make an eloborated one