Inflation is a rise in consumer prices, increasing the cost of living. Some inflation is caused because a country has printed too much money or experienced tremendous financial disaster, causing its currency to plummet. Other sources of inflation can be higher input or transportation costs such as gas, which makes it more expensive to ship good to the store. When the pressures get too great, retailers often pass these costs on to consumers.
Types of Inflation
Demand Pull Inflation
Under this situation the economy demands more goods and services than what is currently available in the market. The shortage in supply provides sellers an opportunity to raise prices until equilibrium is put in place between supply and demand.
Cost Push Theory
It is also referred to as "Supply Shock Inflation". It means that shortages of goods or lack of supply of a certain good or product would affect the economy by raising prices all along the supply chain from the producer to the consumer.
The supply of money also plays a vital role in inflationary pressure. Monetarist economists state that if the money supply is not controlled adequately, it could grow at a rate faster than the potential output in the economy or real GDP. This in turn would drive up prices and result in inflation.
Effects of Inflation
The value of the currency would go down as inflation goes higher. If the balance between supply and demand goes out of control, buyers would change their spending habits and suppliers of goods would suffer and would be forced to reduce output.
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Causes of Deflation
- Decrease in the money supply
- Increase in the supply of goods
- Fall in the demand for goods
- Escalation in the demand for money
Effects of Deflation
When prices are falling, the producers buy material and other inputs at higher prices and are forced to sell the products at lower prices. It eventually results in over production of commodities.
During deflation, the trader purchase goods at higher prices and had to sell later on at lower prices due to deflationary trends. They thus, lose in the bargain.
The equity holders lose during deflation and debentures holders gain when prices fall.
Fixed Income Groups
The pensioners, wage earners, gain during deflation as the wages, pensions etc do not decrease with fall in prices.
Inflation Rate in Malaysia
Inflation Rate (Consumer Prices)
Last Updated on: 18-11-2009