The influence of inflation on economic

Global growth is picking up somewhat after a number of weak years. A global GDP growth rate of 3. The US and UK recoveries are self-sustained, but weaker than during a normal post-crisis period. In the Eurozone, expansionary policy is still called for and further steps to support growth could be expected.

Erodes Purchasing Power This first effect of inflation is really just a different way of stating what it is. Inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy.

Within living memory, the average price of a cup of coffee was a dime. Today the price is closer to two dollars. In those scenarios, the price of coffee would rise, but the rest of the economy would carry on largely unaffected.

That example would not qualify as inflation, since the only the most caffeine-addled consumers would experience significant depreciation in their overall purchasing power. Inflation requires prices to rise across a "basket" of goods and services, such as the one that comprises the most common measure of price changes, the consumer price index CPI.

When the prices of goods that are non-discretionary and impossible to substitute — food and fuel — rise, they can affect inflation all by themselves. For this reason, economists often strip out food and fuel to look at "core" inflationa less volatile measure of price changes.

Encourages Spending and Investing Skip to top A predictable response to declining purchasing power is to buy now, rather than later.

A period of high inflation, high unemployment, and huge government deficits weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity. Instead, monetary policy—controlling the nation's money supply through such devices as interest rates—assumed a . 1. Introduction. The purpose of this study is to empirically examine the impact of inflation on economic growth in Sri Lanka using annual data set on real gross domestic product (GDP) and consumer price index (CPI) for the period of to THE EFFECT OF INFLATION AND INTEREST RATE ON ECONOMIC GROWTH OF NIGERIA. ABSTRACT. The gross Domestic product Growth is a long term rise in the capacity to supply increasingly diverse economic goods o its population.

For consumers, that means filling up gas tanks, stuffing the freezer, buying shoes in the next size up for the kids, and so on. For businesses, it means making capital investments that, under different circumstances, might be put off until later.

Over the long term, equities have been among the best hedges against inflation. At close on Dec. Of course not every stock would have performed as well as Apple: Causes More Inflation Skip to top Unfortunately, the urge to spend and invest in the face of inflation tends to boost inflation in turn, creating a potentially catastrophic feedback loop.

As people and businesses spend more quickly in an effort to reduce the time they hold their depreciating currency, the economy finds itself awash in cash no one particularly wants. In other words, the supply of money outstrips the demand, and the price of money — the purchasing power of currency — falls at an ever-faster rate.

When things get really bad, a sensible tendency to keep business and household supplies stocked rather than sitting on cash devolves into hoarding, leading to empty grocery store shelves. From to Decemberan index of the cost of living in Germany rose by Raises the Cost of Borrowing Skip to top As these examples of hyperinflation show, states have a powerful incentive to keep price rises in check.

For the past century in the U. To do so, the Federal Reserve the U. If interest rates are low, companies and individuals can borrow cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat.

In other words, low rates encourage spending and investing, which generally stoke inflation in turn. By raising interest rates, central banks can put a damper on these rampaging animal spirits.

Suddenly the monthly payments on that boat, or that corporate bond issue, seem a bit high. Better to put some money in the bank, where it can earn interest. When there is not so much cash sloshing around, money becomes more scarce.

If the amount of money is growing faster than the economy, money will be worth less and inflation will ensue. As the money supply decreases, so does the rate of inflation. Lowers the Cost of Borrowing Skip to top When there is no central bank, or when central bankers are beholden to elected politicians, inflation will generally lower borrowing costs.

If the government itself is heavily indebted, politicians have an even more obvious incentive to print money and use it to pay down debt. If inflation is the result, so be it once again, Weimar Germany is the most infamous example of this phenomenon.

• Keep Exploring Britannica
• The costs of inflation
• War and Economic History
• Factors that influence inflation – KuenselOnline

That does not mean the Fed has always had a totally free hand in policy-making, however. Reduces Unemployment Skip to top There is some evidence that inflation can push down unemployment. Wages tend to be stickymeaning that they change slowly in response to economic shifts.

The same phenomenon may also work in reverse: See also, Giants of Finance: That hypothesis appears to explain the inverse correlation between unemployment and inflation — a relationship known as the Phillips curve — but a more common explanation puts the onus on unemployment.

As unemployment falls, the theory goes, employers are forced to pay more for workers with the skills they need. Skip to top Unless there is an attentive central bank on hand to push up interest rates, inflation discourages saving, since the purchasing power of deposits erodes over time.

That prospect gives consumers and businesses an incentive to spend or invest.Inflation means there is a sustained increase in the price level.

The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors). Inflation is caused by an increase in the supply of money which leads to increase in aggregate demand.

The higher the growth rate of the nominal money supply, the higher is the rate of inflation. Modern quantity theorists do not believe that true inflation starts after the full employment level. War and Economic History. War has influenced economic history profoundly across time and space.

Winners of wars have shaped economic institutions and trade patterns.

and inflation and economic growth on the other. The s mainly followed a predicted long-wave phase of sustained low inflation, renewed growth, and reduced great-power. Effects of Health Care Spending Overall Economy The gap between the growth in health care spending of percent and overall economic growth of percent, which means a larger share of more resources are being devoted to health care relative to other goods, will impact the public and private sectors of the economy.

[10]. twin factors that affect a bond's price are inflation and chang-ing interest rates. A rise in either interest rates or the inflation To try to slow the economy by making it more expensive to borrow money.

For example, when interest rates on mort- Bonds, Interest Rates, and the Impact of Inflation See disclaimer on final page Page 1 of 2. Inflation and the Stock Market The Effect of Inflation on the Demand Price of Shares Consider first an economy in which there is no inflation.