Inflation, in itself, is nothing to worry about. In fact, this is something that is happening naturally and steadily over time. That’s because inflation is simply defined as a steady increase in the price of goods, typically over the course of a year. It’s all about how much a single unit of currency can buy you.
The inflation rate is measured as a percentage. So if the rate is 5%, then the price of a loaf of bread may increase from $1 to $1.10. 10% would actually be a substantial increase, because while it might not sound like much, if it continues at this rate then the cost of living will double in just ten years.
The goal of many economies is to maintain an inflation rate of between 2% and 3%, which is considered acceptable. This means that prices are always increasing, but by an amount that is so small, the rest of the economy should be able to catch up. After all, GDPs are expected to increase year-on-year as well, as is the minimum wage. So it all balances out in the long run.
There is no agreed-upon cause for inflation, but this is a subject that economists have debated over for many years. Two of the theories that have been accepted by most economists are:
Demand-Pull: This is a simply case of supply and demand. Simply put, if there is a greater demand for something, with more consumers chasing the same products, then the value of those products will increase. And if the value of many products increases, this will be felt throughout the supply chain and it will also rub-off on other products, creating a rise that can be felt nationwide. This tends to result when there is more money going around, which is why this technique has been described as “too many dollars chasing too few goods”.
Cost-Push: This theory describes a phenomenon in which inflation is caused by an increase in the price of raw materials and wages. Simply put, if a company needs to pay more to acquire the same materials needed to make their products or run their business, and if they need to increase the wages they pay to their employees, then they will look to increase the price of their product or their service. This means that an increase in the price of raw materials will be felt by the end consumer and by the economy on the whole.
Inflation is considered to be a bad word by the general public who associate it with difficult economic times. But as mentioned above, it’s common and in most cases it’s expected. As a result, banks and governments can make allowances for it, changing interest rates, increasing wages, and so on. If it is not expected, then that is when the issues arise. However, even then, it is something that can be countered and something that shouldn’t have too much of a negative impact on the economy.
The same can not be said for hyperinflation though, which is definitely a bad word and one that we all need to worry about. Hyperinflation is inflation that occurs as a rapid rate, with the price of goods spiraling out of control in a way that is unexpected and a way that is difficult to stop.
Hyperinflation has been known to cause a drastic rise in basic goods, so much so that a loaf of bread that costs $1 one day, can cost $5 the next. This makes it difficult for the people to support themselves and it also weakens the currency, so much so that it may not be worth anymore than the fractional value of the paper on which it was printed.
One of the main causes of hyperinflation is an increase in the money supply that is not supported by GDP growth. This can result from the government printing more cash, whether for its own means, to support a debt or for a war effort. If the value of the GDP increases, then the natural flow of money will ensure that everyone benefits. Inflation will occur, but in a controlled way. Without this natural process, that extra money simply devalues all of the other money in circulation, and once hyperinflation is triggered it causes a panic and a desperation that only makes things worse.
Thankfully, this is very rare, but there have been instances of this occurring in first world countries.