RATE OF INFLATION Meaning and
Definition
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The rate of inflation refers to the percentage increase in the average price level of goods and services in an economy over a specified period of time, typically measured on an annual basis. It is a key indicator used to gauge the erosion of purchasing power and the general rise in prices within an economy.
To calculate the rate of inflation, the average price of a basket of goods and services is compared between two time periods. The basket usually includes a variety of essential consumer goods and services such as food, housing, transportation, and healthcare. The change in price between these two periods is then expressed as a percentage.
Inflation can be categorized into two main types: demand-pull inflation and cost-push inflation. Demand-pull inflation occurs when aggregate demand exceeds the available supply, increasing prices. On the other hand, cost-push inflation is caused by rising costs of production, such as wages or raw materials, leading businesses to raise prices to maintain profitability.
Governments and central banks closely monitor the rate of inflation as it impacts a range of economic factors, including interest rates, investment decisions, and wage negotiations. High inflation can erode people's savings, reduce consumer purchasing power, and disrupt economic stability. Conversely, low or negative inflation (deflation) can adversely affect economic growth as it may discourage spending and investment. Monetary policy tools like interest rate adjustments and open market operations are often employed to influence inflation and maintain price stability.
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