In simple terms Inflation is a factor that gradually decreases the purchasing power and reduces the value of money in circulation.This means ,now we have to pay more than earlier for goods or services that it used to be.Thus,I can say that Inflation causes increase in cost and decrease in value of money.Reduction or devaluation of money refers to decrease in purchasing power. Inflation is the gradual long term increase in the value of the goods and services owing to devaluation of currency.
The more will there be the quantum of money supply,the more the value of currency would go down and vice versa.
Therefore, inflation depends on to a great extent on the ratio of supply and demand of money or currency.It increases the basic prices of goods or services for day to day use thus leading to extra burden on one’s pocket and reduces the purchasing power with the same amount of money as earlier.
There’s no single universally accepted reason for inflation,but modern economic experts have defined inflation into basic three categories and also some say they are not any types of inflation and rather causes of inflation.
Three basic types of Inflation:
- Cost push inflation;
- Demand pull inflation;
- Monetary inflation;
- Cost push inflation: This inflation is caused due to increase in the wages that bounds business houses to increase prices to cover for high labor costs.
- Demand pull inflation: This inflation is caused owing to high consumer demand backed by easy credit finance.
- Monetary inflation: This inflation is caused when there is increase in money supply by the Government to cover its deficits and pay off debts by printing more currencies.
Inflation is measured by increase in the broad index i.e. Consumer Price Index (C.P.I). Inflation always tries to outperform G.D.P or Gross Domestic Production.Though inflation is not always bad for the economy.An inflation rate of 2% to 3% is good as it helps to boost up the economy in various ways.
There may be many other causes of inflation but I have tried to keep this discussion very simple and easy to understand for everyone.