What Is Inflation?

1.        What Is Inflation?

Inflation refers to the increasing price of goods and services that ultimately decreases a nation's purchasing power. As the cost of living increases, each unit of currency buys less. The result is a decrease in the value of a nation's currency.

2.        Measuring Inflation

Inflation is measured by Statistics Canada using the Consumer Price Index (CPI). The cost of a fixed "basket" of goods and services purchased by typical consumers is tracked over time. About 650,000 prices are checked each year across Canada.

3.        Inflation Rate

The number that determines the rate of change of prices (usually calculated monthly or annually) is the rate of inflation. The core rate of inflation excludes the most volatile items in the CPI basket, such as gasoline, vegetables, and tobacco.

4.        International Lending And Exchange     Ra Rates

As nations borrow money from each other, prices can rise as a response to interest and national debt. Inflation can also occur when a currency's exchange rate plunges, causing imports to spike in price.

5.        The Money Supply

Widely considered a long-term cause for inflation is the amount of money in circulation. However, there is disagreement among economists as to how the money supply affects inflation. Many say that as governments print excesses of money to cope with crises (for example, to revive an economic recession), prices increase dramatically. But others argue the recent economic crisis, which resulted in the printing of money but little inflation, disproves that theory

6.        Production And Labour Costs

Production and labour costs are factors contributing to inflation. If the raw materials for a product increase in price, so does the price of the final product. Similarly, a rising cost of living causes workers to demand increased wages--costs that are passed on to the consumer.

7.        Deflation

When prices fall, what occurs is the opposite of inflation: deflation. This is typically considered dangerous because lower prices can correspond with lower demand, leading to a deflationary spiral. Depressions are linked to deflation, but deflation itself doesn't always symbolize a bad economy. For example, more efficient production can result in price deflation, but that doesn't indicate a shrinking economy.

8.        Hyperinflation

Fast economic growth is not always beneficial because it can lead to hyperinflation--a cycle of rapidly rising prices. When there is a drastic increase in the money supply without a corresponding increase in demand, the value of each unit of currency diminishes. In the picture above, a woman protests hyperinflation by carrying around worthless notes in Serbia during its hyperinflation crisis in 1992

9.        Controlling Inflation

The Bank of Canada employs interest rates to maintain a target inflation rate. The bank can raise interest rates when inflation is too high, or lower them when it's too low. With high interest rates, demand typically decreases for certain goods and services as they become harder to finance

10.             Other Methods Of Control

In an attempt to control inflation, Prime Minister Pierre Trudeau's government introduced the Anti-inflation Board (AIB) in 1975. It was the board's responsibility to supervise and control wages and prices, and was part of a 1970s trend -- followed even by U.S. President Richard Nixon -- that saw politicians attempt to legislate away inflation. Canada's program was phased out in 1978, and most Western countries abandoned price controls after finding them largely ineffective.

Source: Canada Inflation: February Sees Jump As Gas, Food Push Prices Up, Huff Post, 03/23/2012