Presentation On a Written essay On Inflation

Inflation is an economic phenomenon which occurs when general price level sustainably increases. When a quantitative measure in the average price level of particular good and services is observed in an economy over a fixed period of time, it indicates that there is inflation in the economy. In the simplest words, it is increasing in prices of goods and services. In any economy, a particular amount of money can buy particular goods and services but when the same amount of money is not enough to buy the same amount of good and services, it is an indication of inflation. During inflation, the value of money decreases sustainably and more money is required to buy the same product and services. Inflation is usually measured in percentage. A lower percentage shows that there is a small increase in general price but a larger percentage shows that the price has increased at a larger rate. The growing percentage shows that there is a decrease in ability or purchasing power of a currency. Inflation affects every aspect of the economy and the general price of everything increases form basic necessities to luxury products. It is usually linked with prices of oil and petrochemicals. An increase in petroleum products means an increase in every other product and service because every sector of the economy is linked with the petroleum industry. A decrease in petroleum products is supposed to bring down inflation rate and result in a decrease in prices but it does not happen all the time. Inflation makes it difficult for people with fewer economic resources to buy even the basic commodities and as a byproduct the number of people below the poverty line increases. Inflation can be divided into various types based on its features. Three main types of inflation are demand-pull inflation, built-in inflation and cost-push inflation. Inflation indexes are used for measuring the inflation rate. Two most commonly employed methods are wholesale price index and consumer price index. Inflation has varying impacts on different types of assets. Inflation could have positive outcomes for tangible assets including property and stocked commodities as their values increase because of inflation. On the other hand, there is the negative repercussion of cash because of inflation as the value of cash holdings erode greatly. This essay will explore both the positive and negative sides of inflation (Chen, 2020).

To begin with, moderate inflation can enable economic growth along with an adjustment in real wages and prices. Also, inflation is a better option as compared to deflation which results in a recession. Deflation is negative inflation which means a fall in prices. This is a harmful process for the economy because when prices start decreasing people assume that there will be more decrease in price and they become reluctant to spend their money. Their delay in making the purchase decision disturb the whole cycle of the economy and result in increasing values of debt. It also leads to a reduction in disposable income of people. Individuals dealing with debt come under severe pressure in such situations which is evident form similar situations in Japan during the 1990s and 200s and in Eurozone during 2010s.

Moderate inflation can help adjust wages. Economist believes that with a moderate rate of inflation, the adjustment of relative wages is possible. The nominal wage cut is not possible during normal times because workers resist and resent any cut in nominal wage. But during inflation, when the average wages are increased, the process of increasing wages of productive workers become easier while at the same time the unproductive workers have frozen wages which is equivalent to a real wage cut. With zero inflation rate, there could be real wage unemployment and firms will be unable to cut wages for attracting workers.

Inflation could provide opportunities for adjusting relative prices. Moderate inflation could help adjust relative prices which is not possible during zero inflation. This holds true especially for single currency countries and regions like Eurozone. N Eurozone, Greece, Spain and Italy filed to compete and became uncompetitive which resulted in large proportions of current account deficit. The reason behind it was that both Greece and Spain could not devalue in a single currency so they have to reduce relative costs to achieve competitiveness. With moderate inflation in Eurozone, this situation can be remedied and relative prices can be adjusted to restore competitiveness.

Inflation can increase the growth of the economy. During low inflation, economies generally get struck in recession but a higher rate of inflation could boost economic growth. This opinion is controversial as many economist support it but there are others who do not agree with it. Inflation is a better option than deflation because when the prices fall they result in real debt burden which leads to lower investment and spending. Deflation, in turn, could lead to a recession (Pettinger, 2019).

Inflation is largely a negative force of the economy. Inflation rate higher than 2% is considered as a problem. When the rate of inflation increases the economic condition gets worsen. Hyperinflation could result in lose f savings and bring great instability. Inflation brings instability with it. Even the economic growth during inflation is unsustainable because it booms at the start but during the longer term, it is disastrous. One evident example of this case is from the inflation period in the UK during the late 1980s. During the inflation period, first, there was an economic boom but it proved to be unsustainable and all the efforts of the government to reduce inflation resulted in the economic recession of 1990 -1992.

Inflation reduces the opportunities of investment and in extension scope of long-term economic growth also shrinks. Inflation brings uncertainty with it and people are generally uncertain about what is going to happen next so they keep their savings with themselves due to this confusion and not invest the money. This situation is harmful to long term economic growth. Although it is important to mention here that this situation is true only for high inflation because ow inflation actually brings stability and hence provide encouragement to firms and individuals to take a risk and invest their money.

Inflation and un-competitive economy are two closely related phenomena. With high inflation, there is relatively lower competition coupled with current account deficit. This phenomenon in large leads to lower economic growth. This is significant for regions with one currency like Eurozone as its most evident examples come from Italy. Furthermore, real wages are also affected b inflation in some cases. When the inflation rate increases than the nominal wages the real incomes get impacted. This was a prominent phenome in the economic recession of 2008-16. The value of savings is reduced during inflation. Inflation results in the devaluation of money as now more money is required to make the purchase. This case gets complicated when the inflation rate is higher than the interest rates. Savers are largely impacted and in a negative way because of higher inflation rates. The impact of inflation is worse for cash holdings than the tangible assets like property because of the value of property increases because of inflation but the value of cash holding decreases (Khalid, 2017).

Inflation is measured to inflation indexes. Two most commonly employed indexes are consumer prices Index (CPI) and Wholesale Price Index (WPI). CPI measures the average prices of goods and services of primary consumer goods including medical care/health care, food, clothing, shelter, and transportation. It is measured through a comparison in prices of baskets of goods and services. The second type is the wholesale price index which is used to measure the prices of goods and services before they reach the retail level.

References Chen, J. (2020, March 26). Inflation. Retrieved from Investopedia: https://www.investopedia.com/terms/i/inflation.asp Khalid, A. (2017, March 27). Inflation: what are the advantages and disadvantages. Retrieved from Dirwell: http://topics.dirwell.com/business/inflation.html Pettinger, T. (2019, July 24). Inflation: advantages and disadvantages. Retrieved from Economics Help: https://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/