Inflation
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Inflation is defined as "an increase in the average level of prices" as measured by the Consumer Price Index. Inflation is a sustained rise in prices over a period of time. A sustained period is regarded as at least several months or over a year's time. A one-time jump of prices by ten percent, for example, would not be considered inflation by economists. On the other hand, a price rise of one percent measured by the Consumer Price Index over the course of a year would be inflation. It would be regarded as low inflation and acceptable inflation.
Inflation can cause serious economic problems and even social problems if it causes an economy to stall because consumers cannot keep up with the rising prices and business cannot afford to pay higher wages or to hire more workers or purchase equipment to increase output.
- Inflation reduces the value of savings.
- Inflation turns people to speculating by trying to guess "where changes in relative price differences will occur most rapidly [and] putting more financial resources into existing goods whose prices they believe will inflate the fastest."
- Speculation about inflation occurs at the expense of research on new products which would take time to develop and bring out on the market and investment in new factories and equipment.
Besides harmful economic effects, inflation can have harmful social effects. The harmful social effects come about from the "income redistribution effects" of inflation. During a period of inflation, a country does not as a whole have a loss in its total income. What happens though is that individuals in certain positions in the economy gain a disproportionate share of the income.