Article of Economy

Article of economy

INFLATION – CAUSES AND EFFECTS

Older people often talk about how cheap things were when they were young. A brand new car may have cost only $5,000 compared to $20,000 today, or petrol that cost only a few cents in the 60s costs over a dollar today. Inflation happens when money loses some of its value. We measure the rise of inflation in percent. For example, 2% inflation means that a $1 bottle of milk will cost $1.02 next year.

Causes of Inflation

Inflation has many causes. In times when the economy is good and people have enough money they want to buy more products than factories can produce, so the prices go up.

Inflation can also happen when worker’s demand more money or when the raw materials that producers need rise in price. The end product becomes more expensive and has to be sold at a higher price.

Some economists say that central banks do not do enough to control how much money there is in a country. There may be more money around than there are goods. Consumers want to buy more products, the demand gets higher and prices go up. Sometimes low interest rates on loans make people borrow money to buy houses or cars. These prices go up as well.

Inflation is not produced by one country alone. Sometimes a country cannot control the prices of certain goods as it would like to. A country that does not have any energy supplies of its own has to import energy. It has to pay a high price for oil and gas.

Inflation in the past happened in times of crisis, war or conflict. Governments printed too much money and didn’t have the goods that people could buy. This happened in the final years of World War II. By the end of the war the German currency was not even worth the paper on which it was printed.

Effects of inflation

Inflation is a sign that the economy is growing. It is normal when prices go up only a few percent every year. High inflation, on the other hand, leads to uncertainty in the population.

Industries may not want to borrow money and invest when inflation is high. People don’t want to buy goods any more. Factories may get stuck with products they cannot sell and as a result workers get unemployed.

It is very difficult to fight inflation. Banks can control interest rates and make it difficult for people to get loans and have more money. Governments have an effect on inflation when they raise or lower taxes. They can also try to control wages and prices as far as possible.