inflation in usa

Topics: Inflation, Monetary policy, Economics Pages: 3 (1223 words) Published: March 21, 2014

Inflation is the continuous increase in the general price levels of commodities in the economy over a period. It is identified with the market fall of the value of money in a particular economy. This recurring price increase erodes the purchasing power of money creating economic distortions and uncertainty. Inflation may also be described as a sudden increase in supply of money in a given economy. This results to each unit of currency buying fewer commodities thus a reduction in the purchasing power per unit of money. It can also be viewed as an increase in the supply of money at a rate that is higher than the rate of production in the country's economy. When this price increase is gradual and irregular, it leads to creeping inflation. This is healthy for the economy. It stimulates the economy encouraging social and economic progress. It also makes it easier to adjust relative prices such as salaries employees receive. While mild and gradual inflation is considered to be an indicator of a healthy economy, inflation above this slow rate has a negative impact in the economy. Taxes imposed to citizens increases with increases in supply of money to the economy. This makes people to become more willing to spend because of two main reasons: to purchase commodities before they increase in price and to avoid paying tax on holding currencies. This results to the growth in demand for various commodities thus raising their prices as dictated by price mechanism. This strengthens the rate of inflation and increases the velocity of money, a process referred to as the vicious cycle and is difficult to harness, leading to hyperinflation. High inflation rates and hyperinflation lead to bad economic times. As prices rise, the purchasing power of a currency unit decreases thus leading to an increase in uncertainty. This encourages purchasing greasing the vicious cycle while at the same time discouraging savings and investments. Unequal...

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