Inflation And Its Effects

How inflation effects the economy

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What Is Inflation?
Inflation basically finds how the cost of one good or product changes over a period of
time. The number of good used is called the "basket of goods" and there are over 600
products tested. An example of this is that last year a box of eggs cost about five
pounds. However after an exact year you find the price of the box of eggs is now s8ix
pounds. This means that your rate of inflation has risen and by twenty per-cent. This is
quite a drastic rise which is why it is only an example.
A lot of the time, inflation is referred to as the "cost of living." If inflation rises then the
cost of everyday things rises, this causes a rise in the cost of living.
When is Inflation Most Likely?
As you can see this is the
business cycle. In the business
cycle the economic activity
increases and decreases over
time. In times of recession the
inflation in an economy will rise
thus leading to the dip. However
when the business cycle is
recovering then the inflation will
rise again.
This does sound quite wrong but
it is actually true because in a
recession less people will be
buying things or are less likely to spend money when they have less money coming in.
This means that businesses will be severely affected and will therefore reduce their
prices. Customers will notice this and they will hold their money because they think that
the prices will come down even more. This lack of money back into the economy means
that the economy gets worse and worse.
To get out of the recession the government tries a range of strategies. For instance the
government invests in large scale projects in which lots of people will be employed like
the building of roads. This helps the economy because the workers will have to pay taxes
to the government. This is a cycle and it helps the economy to recover.
However when the businesses I mentioned earlier notice an upturn in the economy,
they raise their prices again. This means that the inflation rate will be rising.
What is the Main Cause of Inflation?
The main cause of inflation is unemployment. If people are unemployed then they won't
have to pay taxes. This means that the government doesn't have as much money to
spend on projects as they should have. Therefore more people will become unemployed

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This is a cycle and it is the main cause of inflation. Because there is so much
unemployment, businesses will realise that people will have less money to spend, so
they reduce their prices but when the economy lifts again, they also raise their prices
which again leads to another recession.
Zimbabwe: A Case Study
Zimbabwe is a really good example of inflation really
getting out of control. The type of inflation that
happened there was called hyper-inflation.…read more

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One of the key differences between the two main indexes is that RPI includes housing
costs such as mortgage interest payments and council tax, whereas CPI does not.
How is it Controlled
Inflation is mainly controlled by the government. They have all the CPI rates so they can
see if interest rates are going up. If there is a rise then the government introduces
higher interest rates and VAT in order to combat this.…read more


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