Understanding Inflation and Effectively Managing it


Inflation is the periodic increase in the price of goods and services. This causes a wide change in our cost and standard of living. This is pure economic definition, but in general, it means that over time we need to spend more of our money to satisfy our needs ranging from day to day to long term. Inflation has an effect on the economy as a whole. It has connected effect when it affects the value of a common currency, for example, the dollar.

When the price of goods increase, our cost of living will decrease and this has an effect on our standard of living and that is why inflation is considered bad for an economy and its people.


  • Inflation is caused when the demand for particular good and services in an economy increase continually. This happens when the money supply in an economy increases.
  • Inflation occurs when there is an increase in the cost of production in an economy. This means the manufacturing a good from the first step till its completion and the costs associated with this is increasing and thus the producers impose this increased cost on the price at which it will be sold to the market.

Measures of inflation:

The government has formulated certain figures or indices to measure inflation effect on the rise of prices. They are:

1. Consumer price index: this is the value of the rise in the price of necessary goods in daily use like groceries, gasoline etc. These are called consumer goods. This measures price change from the perspective of the purchaser.

2. Producer Price Index: this measures the change in selling prices over time and this affects the perspective of the seller.

Some of the other measures which determine inflation are:

  • GDP Deflator: a measure of the rise in the price of a good with regard to the gross domestic product of the economy.
  • Asset price inflation: an increase in the price of fixed assets or financial assets like land, stock etc.
  • Regional inflation: price variation in different places which fall under an economy and the effect of these on the entire economy.
  • Historical inflation: making a calculation of price change in the country in periodic effect, comparing the living standards from previous econometric date obtained.

Such calculations and findings help in knowing what causes inflation and what will be the effect of it on the standard of living. This is helpful in regulating measures to manage the blow on the cost of living of people and economic challenges. Hence the inflation can be managed accordingly by the research of the changes in the economy.




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