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The various kinds and causes of inflation

You might know that inflation has much to do with the price of goods and services, but you're not the various kinds and causes of inflation sure how they are related.

Why does inflation occur, where does it come from and why does inflation matter to small businesses? In this article, we break down the basics of inflation and dispel common misconceptions about it. Inflation rate Put simply, inflation is the rate at which the cost of goods and services rises over time.

It could also be thought of as a reduction in the value of a dollar, because consumers are now able to purchase less than they once could with the same dollar bill. While the annual rate of inflation fluctuates each year, from 1913 to 2013, the U. The CPI the various kinds and causes of inflation price changes from the perspective of the consumer and tracks price changes in various goods and services. The PPI looks at price changes from the sellers' perspective by measuring the prices that companies pay for the raw materials that are used to produce goods.

The PPI is useful, because inflation often begins in the supply chain when the cost of component parts goes up, for example. Manufacturers then charge more for their finished products. The Federal Reserve actively works to maintain an inflation rate near 2 percent.

When the rate gets significantly higher than the 2 percent target, the Federal Reserve can take several actions to try and slow economic growth, including raising interest rates.

While many people may think that all inflation is bad, economists argue that some controlled inflation is good for an economy. Inflation encourages spending, because when dollars are losing value, it provides a disincentive to save those dollars.

Inflation also provides companies with confidence to hire new employees. Inflation only becomes dangerous when it is uncontrolled and unexpected, increasing prices quickly to the point it grinds all spending the various kinds and causes of inflation, therefore, economic activity to a halt.

Inflation: Definitions, Kinds, and Causes of Inflation

The economy doesn't necessarily experience inflation every year. The opposite of inflation, deflation, is when prices go down, and the inflation rate falls below 0 percent. An indicator that economic conditions are deteriorating, deflation often results in lower levels of production and ultimately high rates of unemployment. Types of inflation There are two main types of inflation: Fueled by income and strong consumer demand, demand-pull inflation occurs when the economy demands more goods and services than are available.

Cost-push inflation happens when the demand for goods increases because production costs rise to the point where fewer goods can be the various kinds and causes of inflation. Both drive prices upward. Other types of inflation include hyperinflation, a rapid and out-of-control form of inflation; pricing power inflation, the various kinds and causes of inflation occurs when businesses raise prices to increase profits; sectoral inflation, which is when the rising prices are confined to just one industry; and stagflation, which occurs when inflation is rising despite slow economic growth.

History of inflation in the United States from January 1914 to March 2009. Bureau of Labor Statistics History of inflation While the inflation rate has ranged from 1. While inflation rates have only been tracked officially for the past 100 years, it played a significant role in the economy in the years well before that.

Between the various kinds and causes of inflation and 1865, inflation was blamed for two U. In the last century, inflation rates have spiked to 18 percent in 1918, 15. Inflation in the United States has only risen above 10 percent twice since 1980. It topped out at 13. Since the financial crisis in 2008, inflation has remained below 2. As an entrepreneur, it is important to plan and strategize for inflation, even before it arrives.

In a largely recovered economy, now is the time to lay those plans. Chad Brooks contributed to the reporting and writing in this story.

What Is Inflation?

He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by emailor follow him on Twitter.

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