Inflation is rising in the general level of prices for goods and services. During inflation on the same amount of money after some time it will be possible to buy fewer goods and services than ever before.
In this case, experts say that over time the purchasing power of money has declined, the money has depreciated or lost part of its real value. In a market economy, inflation manifests itself in the open form — prices increase.
With administrative intervention in the economy, the inflation can acquire a suppressed form: prices aren’t rising, but there is the trade deficit.
People should distinguish inflation from a spike in prices because it’s a long, steady process. Inflation doesn’t mean the growth of all prices in the economy because prices for certain goods and services may rise, fall or remain unchanged. It’s important to see the change of the general level of prices, i.e. the GDP deflator.
There are the following causes of inflation in economics:
- The growth of public expenses, which causes monetary emission. The government increases the money supply beyond the needs of commodity circulation. It’s typical for the military and crisis periods.
- Excessive expansion of the money supply due to massive lending. It’s important that financial resource for credit isn’t taken out of savings but out of the emission of the fiat currency.
- The monopoly of large firms in determining prices and own production costs, especially in commodity industries.
- The monopoly of trade unions, which limits the ability of the market mechanism to determine the appropriate economic wage level.
- The increase in state taxes and duties, excise duties, etc., in terms of a stable level of money supply.
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