Inflation

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Analyze the possible causes of inflation. what policy or policies may be necessary to ensure the rate of inflation is low. relate your policy discussion to your analysis of the cause or causes of inflation"

In economics, inflation is an increase in the general level of prices of a given kind. General inflation is referred to as a rise in the general level of prices.

The inflation is a fall in the market value or purchasing power of money within an economy, as compared to currency devaluation which is the fall of the market value of a currency between economies. General inflation is referred to as a rise in the general level of prices. Inflation is the opposite of deflation. Disinflation refers to slowing the rate of inflation, that is, prices are still rising, but at a slower rate than before. Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.

Inflation is measured by taking a "basket" of goods, and comparing the prices at two intervals, and adjusting for changes in the intrinsic basket. Thus, there are different measurements of inflation, depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators, or price indexes. The last measures inflation in the entire economy. Inflation measurements sometimes exclude volatile goods from the basket to be able to guage the "core" rate of inflation. (See Core inflation)

In some contexts the word "inflation" is used to mean an increase in the money supply, which is sometimes seen as the cause of price increases. Some economists (of the Austrian school) still prefer this meaning of the term, rather than to mean the price increases themselves. Thus, for example, some observers of the 1920s in the United States refer to "inflation" even though prices of goods were not increasing at the time. Below, the word "inflation" will be used to refer to a general increase in prices unless otherwise specified.

Possible causes of Inflation:
Cost-Push Inflation
The text "Economics" (2nd Edition) by Parkin and Bade gives the following explanation for cost-push inflation:

"Inflation can result from a decrease in aggregate supply. The two main sources of decrease in aggregate supply are

* An increase in wage rates
* An increase in the prices of raw materials

These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called cost-push inflation. It is also known as supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available.

The causes of cost-push inflation can be scarcity of factors of production such as steel, oil etc or there may be increase in demand of factors of production.

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