The Magazine for Asian Investors
Inflation is the increase in the money supply by a central bank also called monetary inflation. Monetary inflation lowers the real value of the currency.
Monetary inflation results in price inflation. Price inflation occurs when a higher amount of money is chasing the same amount of goods/services, or there is a shortage of goods. Which in both cases mean that consumer prices rise. Price inflation is indicated by the consumer price index (CPI). This is the number that the average person is presented with by the government as the inflation number.
The CPI is a basket in which all goods are listed that are essential for living. From this, one can calculate the cost of living.
When monetary inflation gets out of control, hyperinflation results.
Hyperinflation is when inflation gets out of control and the price of goods and services increases uncontrollably. Hyperinflation can occur when governments significantly increase the money supply and economic output remains the same or decreases. Reasons to increase the money supply could be a budget deficit driven by corruption or a weak economy. Most experts speak of hyperinflation when the inflation rate exceeds 50%.
Examples in the present time of countries with hyperinflation are Venezuela or Zimbabwe.
Stagflation is another dangerous type of inflation. Stagflation occurs when the monetary system is inflated, the economy is growing weakly or not at all, and the unemployment rate is high. Due to increased prices but low wages, the population can no longer afford goods and services.
When stagflation occurs, most governments are helpless, as measures to lower the unemployment rate can drive up inflation, measures to lower inflation can drive up the unemployment rate even more. Drivers of stagflation are usually poor economic decisions by governments.
The flip side of inflation is deflation. In deflation, the real value of the currency increases. This means that more goods or services can be bought for the same amount of money. Drivers for deflation can be decreasing demand, a surplus of goods, high unemployment rate, or new technologies.