Whats is inflation rates and how does it affect us?
Answers:
Inflation rates are very important and they affect our livelihood.
Basically when supply = demand and there is no credit, inflation = 0. However in the real world, sometimes demand exceeds supply and so people put their prices up and this causes inflation.
If the government print too much currency (as they have been doing) people feel rich and spend more and this pushes up inflation
As inflation rises, the central banks increase interest rates to stop inflation and this then causes people to cut back on spending.
Those that are heavily indebted such as home-buyers with big mortgages find that they have little money left and struggle with repayments.
Some of these people lose their houses, others are forced to sell.
With a lot of property on the market, prices are pushed down (opposite of inflation due to excess supply). If property was in a bubble previously (as it is) then a crash results.
In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation). If one likes analogies, the size of a balloon is like the price level, while the inflation rate is how quickly it grows in size. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money.
If P1 is the current average price level and P0 is the price level a year ago, the rate of inflation during the year might be measured as follows:
inflation rate = (P1 - P0)/P0, stated as a percentage (x 100).
There are other ways of calculating the inflation rate, such as the natural log of P1 minus the natural log of P0, again stated as a percentage.
It's the rate at which prices and tax 'GO UP' (hence INflation) and it affects us by leaving every honest, hard working man and woman in this country penniless every month because their salary does not always increase according to inflation (Unless you work for the Government!).
It's the rate at which prices increase. So if something costs £1.00 this week and £1.04 next week, inflation is running at 4%.
It affects us because the £ (or $) in your pocket does not buy as much when prcies are rising. It's also described as too much money chasing too few goods, so prices go up to make higher profits.
During the 70s, inflation rates were very high and so wage demands to meet increased prices were higher. This then fed into increased prices again for the goods made by those workers who had got a large Cost of Living Increase. So inflation rates rose again. This was a vicious spiral of wage-led inflation which cost many jobs throughout Britain and the West. This was also affected by the Oil Crisis of 1973 when OPEC raised the cost of a barrel of oil to very high levels, again pushing up costs for industry.
It was only slowed when Mrs Thatcher's Tory Gov't squeezed the Money Supply, meaning there was a smaller amount of money in the economy. It took a long while and terrible unemployment (from which we recovered 20 years later) but inflation was brought back under control and the Giov't no longer pumps money into industry to meet wage demands.
It's worth looking-up Keynes work, as it's thought that following his economic dictums led to the hyper-inflation of the 1970s.
It's now seen cleearly how prices and wages impact upon each other and inflation is kept under control.
In the UK, inflation is measured against a "Basket of Goods and Services" the things an average household would need, including mortgages, bread, milk, etc. When those prices rise, inflation is said to rise. It is now controlled by the Monetary Policy Committee of the Bank of England, who raise or lower Interest Rates to squeeze the amount of money consumers can spend (reducing the money supply). The target inflation rate is 2.5%, which keeps the economy growing.
It's funny to think that Mrs Thatcher's ideas which were dismissed as ridiculous in 1979-1983 are now economic orthodoxy.
Hope is useful and not too much
No Inflation, no Balloons!
http://www.csulb.edu/~mbrenner/inflatio..
I will try to give you a better answer than what so far exists.
The inflation rate is the rate at which a price index of a basket of consumer goods increased in a particular time frame (1 year)
The basket of goods reflects an average households spending patterns (so stuff like milk, bread, coke, tv's, ipods would probably be included now, golf green fees are included in NZ).
When prices are increasing (ie an increase in the money supply - the only cause of inflation) the central bank will increase interest rates to do 2 things. 1) encourge people to save, not spend and 2) increase the cost of borrowing.
The money supply is made up of a few factors. The rate at which money is circulated, and the supply of money (printing of money)
If people are spending more, the circulation of money increases (money goes around more, money stored under the matress is spent), and the money supply increases, causing inflation (most likely) In years gone by goverments (germany, argentina) have printed money as a way to economic growth, which caused huge inflation (the only outcome of printing money) and hurts the economy.
Inflation effects people and the economy by distorting economic information. It makes people and business more uncertain as to what the future holds, people will save more money, businesses will not invest to grow their business (risk is higher, plus the cost of borrowing is higher) so the economy will not grow as fast. Not only this but it distrots the value of income, the real value of your money.
When people know their money is not as valuable as it once was, they will demand a large pay increase (above productivity increases) to cover their fall in their real wages. Business will have to pay this. This causes businesses to raise their prices because their costs have gone up, which causes more inflation, which causes employees to demand higher wages, which causes.
Simply put, the inflation rate is the rate at which prices are increasing. If the cost of an apple was 10p last year and now it costs you 15p, then inflation (over the last12 months) has been 50%.
The greater inflation, the more costly life becomes.
People spending too much (via credit etc) can push up inflation, because as people compete to buy a limited number of items, it pushes the price up ... which is why we have ISA's - a way of trying to get people to save, rather than spend.
The inflation affect is also cyclical. By ths I mean, that price increases (via demand) lead to more price increases when people realise that things cost more money to buy and so ask for wage increases. This puts the price (cost) of making things up and so items cost even more to buy .. people ask for even more wages and prices go up again... this goes on & on.
Cheep imports are good (in a simple way) for inflation as they keep prices down (but don't slow down spending) and so keeps inflation low.
To combat inflation (and to stop people spending), the Bank of England can (& do) increase interest rates. By doing this, the rate of interest on money in the bank is better (good for saving) but this also mean that the cost of borrowing goes up - more costly to aquire credit and mortgages. It also means that businesses can't borrow money as cheeply and so companies might also suffer.
It's a difficult one to try and explain in simple term, but it's a huge balancing act to try and get people & businesses to be spending the right amount of money.
Too much spending and we return to the old Conservative days of home reposessions (stupidly high inflation and interest rates) and not enough spending, the economy slows down too much, people aren't buying items, workers are made redundant (with no one buying goods and services, no one is employed to make it) and the economy drops into a huge depression.
The Government & Bank of England have a huge role to play and 'touch wood', no matter what your opinion is of the present Government, they are doing the best job for decades in keeping the balance!
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