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Inflation

Published: 
Sunday, December 3, 2017

The goods and services offered in markets are often susceptible to movements in their prices—they can either go up or down. Inflation, thus, refers to the rate at which the general level of prices for goods and services rises.

Consequently, inflation means less bang for your buck, as it erodes the purchasing power of a unit of currency. Though often used to represent increases in consumer prices (prices paid for final goods at the point of consumption), it can also be applied to other prices such as wages, assets etc. It is usually expressed as an annual percentage rate of change.

As an example, if the inflation rate is 2%, then a pack of gum that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls.

Inflation would not do much damage if it were predictable, as everybody could build into their decision making the prospect of higher prices in future.

In practice, it is unpredictable, which means that people are often surprised by price increases. Most economists agree that an economy is more likely to function efficiently if inflation is low.

That said, to keep inflation low, understanding what drives it is critical. Most economists posit that excessive growth of the money supply drives inflation. Low or moderate inflation may be attributed to fluctuations in the demand for goods and services, or changes in available supplies such as during scarcities.

The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, open market operations, and by even adjusting the reserve requirements of commercial banks.

Inflation however, has its merits to the extent that it shows positive economic activity taking place in an economy, and usually augers well for moderate adjustments in the wage level.

In fact, its opposite, deflation, is often seen as something to be avoided by many economists. In T&T, the Central Bank provides three data points to represent inflation (headline, core and food) with headline being the overall level of inflation, core being a measure that adjusts for volatility and food representing the rate of increase in food prices.

As at September 2017, those inflation figures stood at 1.2 per cent, 1.1 per cent, and 1.8 per cent respectively