inflation

Definition

Sustained, rapid increase in the general price level, as measured by some broad index number of prices (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to save. Any price increase alone (such as due to a crop failure), however, is not inflation. It is because such increases are self-limiting in their effect, unless they cause an inflationary spiral in combination with factors such as wage increases, easier credit, or greater money supply. And because, economies in general show some increases in prices as they recover from a recession. There is no one single, universally accepted cause of inflation, and the modern economic theory describes three types of inflation: (1) Cost-push inflation is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral), (2) Demand-pull inflation results from increasing consumer demand financed by easier availability of credit; (3) Monetary inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits). See also deflation and hyperinflation.