Classical economics īy the nineteenth century, economists categorised three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. When currency was linked with gold, if new gold deposits were found, the price of gold and the value of currency would fall, and consequently, prices of all other goods would become higher. Inflation is related to the value of currency itself. These changes are not related to inflation they reflect a shift in tastes. For example, if people choose to buy more cucumbers than tomatoes, cucumbers consequently become more expensive and tomatoes cheaper. Ĭonceptually, inflation refers to the general trend of prices, not changes in any specific price. Over time, the term inflation has evolved to refer to increases in the price level an increase in the money supply may be called monetary inflation to distinguish it from rising prices, which for clarity may be called "price inflation". The resulting imbalance between the quantity of money and the amount needed for trade caused prices to increase. The term was used "not in reference to something that happens to prices, but as something that happens to a paper currency". The term originates from the Latin inflare (to blow into or inflate) and was initially used in America in 1838 with regard to inflating the currency. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, by carrying out open market operations and (more rarely) changing commercial bank reserve requirements. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Low (as opposed to zero or negative) inflation reduces the probability of economic recessions by enabling the labor market to adjust more quickly in a downturn and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy, while avoiding the costs associated with high inflation. Today, most economists favour a low and steady rate of inflation. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank greater freedom in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation. The negative effects would include an increase in the opportunity cost of holding money, uncertainty over future inflation, which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Moderate inflation affects economies in both positive and negative ways. Low or moderate inflation is widely attributed to fluctuations in real demand for goods and services or changes in available supplies such as during scarcities. There is disagreement among economists as to the causes of inflation. The employment cost index is also used for wages in the United States. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. The opposite of inflation is deflation, a decrease in the general price level of goods and services. When the general price level rises, each unit of currency buys fewer goods and services consequently, inflation corresponds to a reduction in the purchasing power of money. In economics, inflation is an increase in the general price level of goods and services in an economy. UK and US monthly inflation rates from January 1989 to the present.
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