Rate of Inflation

A very important macroeconomic indicator that directly affects the life of virtually all of us is the rate of inflation in a national economy. Inflation is a term that is often heard on television and in other forms of news media, but many people don’t know too much about the concept, except perhaps that it is expressed in percentage points. Simply put, inflation is — as the name suggests — the rise of the prices of goods in the market. A distinction can be made between low or moderate levels of inflation on the one hand, and high inflation or hyperinflation on the other. When experiencing hyperinflation, economies are destabilized and the supply-demand mechanism is seriously disrupted. The phenomenon of hyperinflation is quite common especially in politically unstable periods such during and in the aftermath of wars, etc.

A low or moderate rate of inflation, however, is generally thought of as normal and even desirable by most modern mainstream economists since it provides certain benefits to the economy, such as debt relief for instance (see the difference between real and nominal interest rates on the “Interest Rates” page, and the effect of inflation on them).

High levels of inflation are generally caused by an increase in the money supply, by printing more money for instance. A group of free-market economists known as the Austrian School assert that this is the cause of all inflation and that inflation itself is at the root of the various business cycles (boom/bust). Others, such as Keynesians (so named after the famous British economist, John Maynard Keynes) disagree, asserting that there are few direct links between an increase in the money supply and a rise in consumer prices. Keynesians generally favor some inflation in the economy, seeing it as a remedy for disequilibrium in the labor markets and unemployment.