Inflation
In a functioning economy it is normal for the cost of goods and services to rise. Economic indices should rise in relative concert, such as the mentioned prices and the wages people earn to pay for goods and services. When prices rise faster than other related parts of the economy, then prices are rising at an inflationary rate.
Inflation therefore occurs when costs for goods and services rise faster than the rest of the economy can keep up. This can be felt at the household level. For example, a trip to the supermarket may cost $100 one month, and $115 one year later for the exact same purchased items. That would be annual increase of 15%. If wages on average rose just 5% in the same period, then a typical household will feel the squeeze of seeing their earned money not be able to purchase as much as it used to. The household experiences a loss of purchasing power. A way that inflation is measured is with a representative standard basket of goods, from which the Consumer Price Index is determined.
Inflation is a key economic condition that the Federal Reserve Board watches out for. The Fed is tasked with keeping inflation in check by adjusting monetary policy. Controlling the supply of money helps control inflation as inflation correlates with an excess of available money. A popular phrase describes inflation - "Too many dollars chasing too few goods." This is an essential ingredient of how supply and demand works. When there is less supply (too few goods), the demand for them is not balanced, and since the demand is higher than normal, those with the desired goods can charge higher prices - inflated prices.
Some inflation is normal, and a low inflation rate is desired. Hyperinflation is when the rate of inflation is rising at an incredible rate. No inflation is not desirable as that indicates a stagnant economy, or stagflation.
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Inflation therefore occurs when costs for goods and services rise faster than the rest of the economy can keep up. This can be felt at the household level. For example, a trip to the supermarket may cost $100 one month, and $115 one year later for the exact same purchased items. That would be annual increase of 15%. If wages on average rose just 5% in the same period, then a typical household will feel the squeeze of seeing their earned money not be able to purchase as much as it used to. The household experiences a loss of purchasing power. A way that inflation is measured is with a representative standard basket of goods, from which the Consumer Price Index is determined.
Inflation is a key economic condition that the Federal Reserve Board watches out for. The Fed is tasked with keeping inflation in check by adjusting monetary policy. Controlling the supply of money helps control inflation as inflation correlates with an excess of available money. A popular phrase describes inflation - "Too many dollars chasing too few goods." This is an essential ingredient of how supply and demand works. When there is less supply (too few goods), the demand for them is not balanced, and since the demand is higher than normal, those with the desired goods can charge higher prices - inflated prices.
Some inflation is normal, and a low inflation rate is desired. Hyperinflation is when the rate of inflation is rising at an incredible rate. No inflation is not desirable as that indicates a stagnant economy, or stagflation.
Read more: