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Inflation, deflation and hyperinflation (Consumer price indices (CPIs are…
Inflation, deflation and hyperinflation
Money acts as a medium of exchange where individuals or entities are able to exchange their money for goods and services
If the price paid for goods or services remains constant in the short term however there are factors that may force the price of these goods and services to rise over a particular period
Inflation may be stated as the rate of increase in prices for goods and services. It is effectively a rise in prices with an associated fall in the purchasing power of money. It is a sustained increase in the general price level of an economy. It leads to an increase in the cost of living as prices rise and the purchasing power of each unit of money falls
A country's level of inflation would be based on a large basket of items. The current level of inflation in the UK in 2018 is approximately 2%
A certain level of inflation is acceptable in any economy, particularly if people's earnings keep up with inflation and if they receive pay rises at or above the inflation rate.
Where wages are frozen for many years, this can lead to a fall in the standard of living
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If money supply is increased, there will be more money in circulation within an economy chasing goods and services, this will force prices to increase and thus the inflation rate. If money supply is reduced, the reverse will be true
The annual inflation rate is stated as the annual percentage change in price levels and is measured in the UK by suing government statistics including the RPI and CPI. In the UK inflation rates have varied considerably. In April 2018, the rate was approximately 2% whereas in 94 it peaked at 25%
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Hyperinflation is still inflation but it is characterised by the prices of goods and services rising greatly and rapidly in excess of 50% in any single month. It is this severity that separates from ordinary inflation
The process of hyperinflation may begin when a government prints money in order to pay for spending. As the money supply increases prices rise leading to inflation, however rather than ceasing printing money in order to reduce the resultant inflation, the government continues printing
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Deflation is essentially the reverse of inflation when prices for goods and services fall over time. It is a sustained fall in prices within a defined period
With deflation, money become a commodity with increased value as more can be purchase today than could be purchased yesterday. Initially this may seem good for individuals, particularly those with a considerable amount of disposable income however it may lead to a fall in demand and it is probably an indicator of an imminent recession or in extreme circumstances a depression which will result in falling wages and job losses
Continued falling prices will act as a deterrent to people from spending on products and services in the hope that they will be able to purchase them more cheaply later. This will exert pressure on manufactures to lower prices, resulting in lower wages for the workers and less investment
Consumer price indices
CPIs are important indicators of how economies are performing and as such used by governments businesses and societies as a whole
They may influence interest rates, wages and states benefits demonstrating the effect of inflation on household budgets
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Consumer price inflation may be explained as the rate at which the prices of goods and services bought by households rises or falls
The figure is produced monthly by the Office for National Statistics and estimated using the consumer price indices
Consider a large basket of goods and services purchased by households. Movements in these indices will indicate the changing cost of this basket whether resulting in inflation or deflation
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Retail price index
A general measure of inflation and is used in the UK as the basis of indexation of pensions, state benefits and index linked bonds
Retail sales index
Measures the monthly movement in the average weekly turnover of retailers over a four or five week period
Monthly measure is often taken as an indicator of consumer confidence as it records purchasing trends
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Many goods ordered and supplied through the internet are sourced directly from overseas which makes accurate recording difficult
Hyperinflation: Very rapid inflation that leads to a complete loss of confidence in the sustainable purchasing power a country's currency. It can lead to economic collapse