Unraveling Theories of Inflation in Economics and Its Problem Nature

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Table of contents

  1. Some Theories of Inflation in Economics
  2. Inflation as the Cause of Serious Economic Problems
  3. Conclusion

Inflation is the continual rise in prices, this is also known as a monetary problem. There are different monetary policies in order to keep inflation below a certain level one of these consist of inflation targeting which allows banks to keep a good stability on different prices. There are plenty of theories of inflation in economics and some of them are analysed in the essay. Also here we will explore reasosn why inflation is a serious problem arounf the world.

Some Theories of Inflation in Economics

Friedman once stated that 'inflation is always everywhere a monetary phenomenon' meaning there is too much money in the economy. If the prices begin to rise, due to people being able to get money easily this will be controlled by the Bank of England increasing interest rates which ties into Friedman's theory of inflation. Inflation rises when the rate of growth of the money supply exceeds the rate of growth of output, also known as when too much money chasing too few goods which leads to prices being increased, this is recognised as demand pull as it is pulling up the prices.

The quantity theory of money is also a good way to keep informed on the level of inflation going on in the nation, this is calculated using the formula, MV=PY where M stands for the money supply, V stands for the velocity circulation in money, P stands for the average price of final output and finally Y stands for the real output. This equation is generally stable, although M and P could change due to certain circumstances such as the creation of jobs and how easy it is to get money at that specific time period. There is a substantial amount of evidence linking M and P where if the money supply increases so will the average price.

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According to the Cost-Push Theory, inflation is driven by increases in production costs, such as wages, raw materials, and energy. When businesses face rising costs, they pass on these expenses to consumers through higher prices, resulting in inflationary pressure.

Inflation as the Cause of Serious Economic Problems

There are many issues that inflation can cause one of them being if the prices continue to rise this can lead to a type of inflation called hyperinflation. This is one of the biggest issues with inflation as this can lead to the currency or the item used to purchase goods and services becoming worthless and useless. This will result in not being able to purchase anything with currency and will usually end up with the nation changing currencies to one surrounding them. One example of this is Germany in the 1900s.

Inflation is regarded as a serious problem as there are many issues it can cause with in the markets and economy. One of them being it makes markets work less well. An example of this is the raw materials the company uses to create their products increasing, resulting in them also having to increase their products to sell to customers. This may not apply to all business resulting in some company's gaining an advantage over others.

Another reason why inflation is a serious problem is that it makes the economies less internationally competitive. If that specific nation is undergoing serious inflation problems then the prices of their products may be increasing. This has a large effect on their exports as other countries may not want to purchase overpriced goods. This is because their home nation may not be experiencing inflation and this imported product may look extortionately high in price compared to their own.

Conclusion

Inflation, an economic phenomenon characterized by a sustained increase in the general level of prices, is a complex issue with multifaceted causes and consequences. Theories of inflation provide different perspectives on the origins and dynamics of this phenomenon, ranging from demand-side factors to monetary factors and production costs. However, regardless of the specific theory, inflation is widely recognized as a problem due to its adverse effects on individuals, businesses, and the overall economy.

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