What is Inflation?
Inflation can be a tricky beast to master and define due to its casual use in various contexts. However, for the sake of this article let’s call it the loss in purchasing power of a specific currency. Inflation is triggered by several predispositions.
The increase in prices associated with inflation must be steady and not too fluctuating, but it can’t just be a one-off event either. In other words, a ‘relative-price change’ can’t be part of the equation, as the supply and demand must be imbalanced. Second, inflation involves a general increase in prices of goods and services. While “relative-price change” usually means just one or two goods have increased in price, inflation refers to an increase in costs of nearly all items in the economy.
Furthermore, inflation isn’t a simple short-spanned affair either. It lasts at least a good few years on average, according to most reputable economists. This is shown by annual inflation rate evaluations.
How Does Inflation Work?
Most economists agree on two major sources of large scale inflation. The first is a sudden surge in the production of currency within the circulation, as was seen in the massive imports of gold and silver into Europe from the Americas in the 15th century. The second cause of inflation is an unsealable gap between supply and demand. When the demand exceeds supply, increased prices of a certain good can cause a general price increase of all goods on the market.
Inflation is gauged in several different ways because of how elusive the concept is. The most traditional and generally most reliable technique is to apply domestic surveys of expense and corroborate the data with market values over time. This cross-checking helps determine the true burden of inflation in an economy.
Inflation vs. Deflation
Deflation is not the polar opposite of inflation but is defined as a general decrease in market prices over time. Here’s why it is often as detrimental to the economy as inflation is:
Deflation is notorious for the way it bogs down and retards economic growth. It leads to fewer, less frequent purchases by consumers which reduces production rates due to the drop in demand. This leads to less need to borrow money in the form of loans, so interest rates fall as well. This makes earning any money off a savings account a double-edged sword. Deflation can trigger a negative cascade of increasing deflation as the reduced production causes lower mean income for the masses, reducing demand and offsetting recession.
The Positive Aspects of Inflation
Though inflation is often very harmful, it can have some positive benefits. First, inflation can stimulate a nation’s economy. As more money circulates, there is more money to spend, which creates more demand. This spurs production, reduces unemployment, and puts more money into the economy as a whole. You might be wondering: how can something as disastrous as inflation be under the heading of ‘positive aspects’? Well, the biggest factor is that for better or worse inflation can cause an economy to become active, as demand for many goods rockets upwards. This leads to boosted production, employment and gross income.
Inflation is also often considered a shield against deflation; consumers buy more, raising demand whereas in deflation they would avoid these purchases waiting for prices to drop even further.
Cryptocurrencies and Inflation
Because Bitcoin has a set maximum circulation of 21 million coins, it is protected from inflation and hence is more oriented to deflation. This cryptocurrency is a good investment for economies suffering from hyperinflation, such as that of Venezuela.