Inflation changes the value of money over time – it lowers it.
One of the government’s economic objectives is to keep inflation low and stable. So, money does not lose its value too fast. The government will usually set the target inflation rate and try to keep it at around 2% annual growth.
The spending power of money changes over time. The spending power of USD$100 is all the goods and services that can be bought at a certain point in time with that USD$100. If USD$100 buys fewer goods and services this year than it did last year, then the value of money has fallen. And this was caused by inflation. If USD$100 buys more goods and services this year than it did last year, then the value of money has increased, and there is no inflation.
What is inflation?
Inflation is the trend of general increase in the overall price level of the products in the economy.
It does not measure an increase in the price of one or two products only. But, inflation occurs when there is continual rise in the average prices of majority of the goods and services over a period of time.
During the times of inflation, prices in a country will have the persistent tendency to rise which will be easily noticeable by individual customers and businesses.
Examples of inflation
As mentioned, inflation results in a fall in the value of money. It will make people to afford less products for the same amount of money as before.
An example of extreme inflation:
Example 1: In 2008, the official rate of annual inflation in Zimbabwe passed 100,000%, the highest in the world ever. Food prices rose more than 200,000%. Zimbabwe was facing acute shortages of basic goods such as food, water or gasoline.
An example of high inflation:
Example 2: In October and November, 2008, the official rate of annual inflation in Venezuela remained at approximately 12% in October. It resulted in pressure mounting on the currency.
Examples of proper inflation rates:
Example 3: In September, 2013, the official rate of annual inflation in Malaysia jumped to almost 3% from around 2% in August. Mainly due to higher petrol prices and subsidy reductions for other basic products.
Example 4: The UK has experienced inflation for each of the last 60 years. Although falling to very low levels in 2012 such as approximately 2.5%.
Examples of no inflation:
Example 5: In November 2001, the official rate of annual inflation in Peru rose to 0.04% with higher prices in healthcare and food sectors.
Example 6: In October 2001, the official rate of annual inflation in Uganda fell to -2.6% due to a decrease in food prices.
Who is responsible for managing inflation?
It is usually the national statistics office to measure rates of inflation on monthly and annual basis. And, based on the above information, the country’s central bank will form policies to manage inflation, either do nothing or try to lower inflation when prices are growing too fast.
In the UK, Bank of England is responsible for maintaining monetary and financial stability. In the US, policymakers at The Federal Reserve System (The Fed) evaluate changes in inflation. When it comes to China, People’s Bank of China tracks inflation measures. In Europe, it is European Central Bank, and in Japan, inflation responsibilities belong to The Bank of Japan.
