Inflation: What is it?
Many people living in the United States or around the world aren’t aware of one thing that can affect their everyday lives; inflation. Inflation is a rise in prices, or the decline of purchasing power over time. Inflation is the rate at which prices for goods and services rise, in which the value of money also decreases at the same time. The loss of such purchasing power impacts the cost of living for people, and that can also lead to a deceleration in economic growth. The current inflation rate in the U.S. is around 4.93%, while we achieved 7%+ mid 2021.
Classification of Inflation:
We can classify inflation into three different type: Demand-Pull, Cost-Push, and Built-In.
Demand Pull Inflation:
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- This type of inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy’s production capacity. The richer the person, the more positive consumer sentiment. In return, this causes a higher spending, and that makes overall prices higher. During this process, a demand-supply gap with higher and less flexible supply(which results in higher prices) is created.
Cost-Push Effect:
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- This type of inflation is a result of the increase in overall prices that work throughout the production process inputs. As additions to the supply of money and credit are channeled into a commodity or other asset markers, the cost for all kinds of intermediate goods increases. Such is obvious when there’s a negative economic shock to the supply of key commodities. Throughout this “process”, such developments lead to higher costs for the finished product or service and work their way into rising consumer prices.
Built-in Inflation:
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- Built-in inflation is related to adaptive expectations or the idea that people expect current inflation rates to continue in the future. When the price of goods and services rise, the common people may expect more costs or wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.
Though inflation may seem completely, there are some advantages for certain people, while the disadvantages are also present for the opposing side. Controversy and debate surround the topic, but here we can analyze the advantages and disadvantages of inflation.
Advantages:
People with tangible assets (like property) priced in the currency they use would really appreciate inflation as it raises the price of their assets, as they can flip it at a higher rate. With inflation, there exists unused resources or labor, in which inflation can increase production within. With more cash, the more one would want to spend, which turns to more aggregated demand. With more demand, a higher production rate triggers to meet such demand. Inflation is also considered a net positive only when it is moderate because it motivates wage growth and investment.
Disadvantages:
Though sellers of assets prefer inflation to take place, the buyers of said assets may not be as happy with inflation. Buyers will be required to shell out more money, and people who hold such assets in their home currency would have their real value of their holdings erode. As such, investors who wish to protect their investments from inflation would consider other asset classes, like gold, commodities, or Real Estate Investment Trusts. Another option that helps investors profit from inflation can be Inflation-Indexed bonds. With high inflation, higher prices would be imposed on the economy, buyers have to pay more products and services, and only selected stock prices would go up before others. Other disadvantages of inflation are that such raises the cost of living, it raises interest rates, hurts the growth of stocks and bonds, or it even impacts Low-Income Households Disproportionately.
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