Take Control USA - Inflation and Its Aftereffects If the prices of commodities, services and goods increase over an extended period of time, itâ€™s called inflation. Consequently, currency declines and purchasing power deteriorates, essentially meaning that the currency cannot buy as many goods and services. This is an indication of the loss of value in exchange units of a currency. The loss or gain through inflation is calculated by the Consumer Price Index, which is an annual change in percentage of the general price index. There are two important theories on the causes of inflation: quality theory of inflation and quantity theory of inflation. The former is based on the expectation of the acceptability of a currency, which can later be exchanged for other goods deemed profitable to the buyer. The latter is related to the aspect of currency, which takes into account its supply and demand and, importantly, the nominal values of exchange. There are many effects of inflation, both positive and negative. It can affect the economy as a whole, or hurt specific industries, enterprises or individuals. This is because inflation is not spread uniformly in an economy. Consequently, several hidden costs emerge out of this reduction in buying power, which can hurt some or give an added advantage to others. High or erratic inflation rates are considered damaging to the overall economy. They append inadequacies in the market and make it tough for businesses to budget or strategize for the long-term. Inflation can also appear as a hindrance to productivity, as businesses are required to move resources away from products and services in order to regain a stable footing and return to gaining profits. High inflation can also pressure workforces to ask for pay increases to keep up with market conditions and increased consumer prices. This puts increased pressure on companies to increase their net profits, and because of the economic constraint, they are forced to lay off employees and increase the prices of products, further exacerbating the economic turmoil. A group of economists called Keynesians believe that nominal wages, slow and difficult to adjust, are present because of the loss of jobs during inflation and thus a downward disequilibrium. This, they argue, is the positive side of inflation because by keeping the wages constant, equilibrium in the labor market can be reached faster. Inflation gives banks room to maneuver and control their supply of money and capability to set discount rates at which they can borrow from other central banks. This is because if the nominal interest rates are already low or even zero, the banks cannot decrease them further, and thus remains stuck in a â€˜liquidity trapâ€™. In the end, inflation is a very complex issue that can hurt some and benefit others. While it changes the value of currency and alters the economic landscape of industries and the international market, it is important to look at it holistically. In order to use current inflation as a future learning curve, it is essential to look at its origins and learn from them.
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Published on Oct 24, 2011
Inflation effects on an economy are various and can be simultaneously both positive and negative. As it changes the value of currency and al...