By definition, inflation can be understood as the increase of price levels of goods and services in the economy over a specific period of time. It gives the simple idea of “too much money in the economy with fewer goods”. These gradual price increments reduce the value of each unit of currency leading to an increased cost of living and decreased value of money.
The major causes of inflation can include an increase in costs of production, an increase in demand, and even sudden changes in the money supply. In an economy with abrupt increases in demand and rising unemployment rates, demand-pull inflation can occur due to supply shortages. Similarly, higher manufacturing costs and escalating prices of goods can lead to cost-push inflation. The decline in purchasing power of people and changes in monetary policies implemented by different economies globally also gives a significant impact on the inflation rates. Furthermore, countries that may fail to manage their debts and exchange rate fluctuations may also experience a rise in inflation.
Inflation has proceeded to impact both developed and developing countries with the nations which have the lower foreign income being impacted the most. It affects the cost of borrowing and consumer spending immensely while lowering the value of securities and savings leading to a decrease in corporate investments. One of the major outcomes of inflation is rising unemployment. The devaluation of currency results in much higher wages being paid to employees. Since this creates a disadvantage for companies, they tend to lay off a higher percentage of their staff. This in turn decreases the purchasing power of the public. All these changes ultimately affect the economic growth of a country.
The Covid-19 pandemic has been an added disadvantage to the growth of the world economy. The sudden restrictions and lockdowns worldwide resulted in the decline of the imports and export industry as well as the changes in consumer spending. Due to the lack of foreign income from tourism and exports, currency devaluation has impacted the economy at a much higher rate than the pre-pandemic levels. The rising prices of goods during this period simultaneously with the increase in demand for essential goods and services gave way to a recession in the economy. The high demand for essential products led to shortages that were unable to be covered in real-time along with the declining performance of the service sector.
Even post-covid the inability to recover from the fall has damaged the GDP levels of economies globally. At present, even though restrictions have been relaxed to a certain degree, the excessive price levels of commodities, oil, and gas are still evident.
Developing the ability to assess and control inflation can be beneficial to any country. The key measure to be taken to control inflation is to maintain the balance of payments and money supply within an economy. Keeping inflation and interest rates at lower levels helps the cost of borrowing decrease as well. This encourages consumer spending and even making investments. Accordingly, the rate of unemployment that had previously escalated can be brought down to a considerable level.
This article was written by Theekshana.