What is Inflation?
Increase in the general prices of goods and services.
It is measured as an annual percentage increase.
A healthy economy aims for a 2% inflation rate.
Inflation occurs when the demand for goods and services rises faster than they can be produced.
Prices of goods → Go up
Value of goods → Goes down
If the inflation rate is 3% annually, a packet of Ramen that costs $1 in the beginning of the year will cost $1.03 by the end of the year.
Causes of Inflation
- Problems with supply
- Problems with demand
- Problems with key raw materials
- Monetary policy
Effects of Inflation
- Uncertainty in the market
- Higher income taxes
- Financial hardship on workers
Is inflation good or bad?
- Gives people an incentive to spend and invest knowing that their money will incease in value
- Increased spending and investment can benefit the economy
- Increase in the opportunity cost of holding money
- Shortage of goods as consumers begin hoarding out concern that prices will increase in the future
Average price for one gallon of milk $.20 in 1940 → $3.31 in 2015