Inflation is a situation of rising prices in the economy. A more exact definition of inflation is a sustained increase in the general price level in an economy. The rate of inflation measures the annual percentage change in the price of goods and services and the rate of growth of the economy as a whole.
Inflation and Value of Money
Declining value of money
- “Inflation means that your money won’t buy as much today as you could yesterday.”
- If prices rise, the same amount of money will purchase a smaller quantity of goods
- The biggest decline in purchasing power of the dollar occurred in the 1970s when inflation was highest
UK Inflation since 2008
Inflation was close to the government’s target of 2% between 2000-2007
- In 2008, inflation peaked at 5%, primarily because of a surge in the price of oil.- Inflation fell in 2009, because of the recession and fall in demand.- Deflation in mid-2015
Measuring inflation
To calculate inflation, the statistics authority (ONS) Measure the price of 1,000 goods every month Gives a weighting to different goods depending on how important they are in a typical basket of goods.
- An index is created with calculates the weighting of good * price change
Types of inflation
Cost-push inflation: caused by a rise in the cost of production, such as higher oil prices
Definition Hyper-Inflation
Hyperinflation is generally considered to occur when inflation is greater than 1000%.
- With hyperinflation, money loses its value so rapidly that nobody wants to use it as a medium of exchange.
- In 1920s Germany had inflation of 100 billion %, and in 1946 Hungary had an inflation of 42,000 billion per cent.
