It is a sustained increase in the general price levels of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Inflation reflects a reduction in the purchasing power per unit of money (Barro, 1997). Inflation affects economy in various ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investments and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.
Positive effects include include reducing the real burden of public and private debt, keeping norminal interest above zero so that central banks can adjust interest rates to stabilize the economy, and reducing unemployment due to nominal wage rigidity (Hall & Taylor 1993). The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index. The inflation rate is the percentage rate of change in a price index over time.
Consumer Price Index
A consumer price index measures changes in the price level of market basket of consumer goods and services purchased by households. It is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically (Burda, 1997). The annual percentage change in Consumer Price Index is used to measure inflation.
How inflation has affected individuals or groups
As indicated in the graph, the inflation over the last four years between 2012 and 2015 has been reducing significantly. Between 2014-2015 periods there was experienced a drastic drop in the inflation rate by a margin of 1.5 % which was the highest for the period. From 2015 to 2016, a sharp increase in the inflation rate was experienced with a margin of 1.2 %. This almost undid the reduction experienced in the same year.
Effects of inflation the household
Rising prices makes it easier for companies to put up wages. They also give employers the flexibility not to increase wages by as much as inflation, but still offer their staff some sort of rise. In a world of zero inflation some companies might be forced to cut wages. In the case of rising inflation, the workers may get a corresponding increase in their salaries so as to cope with the rising inflation. In this case therefore, inflation is beneficial to the workers.
In an example of falling oil prices, as motorist we have benefits due to the reducing inflation rate. The effect of this to the family is that we made a saving from the reduced fuel cost. This leads to increased saving and thereby making money available for investments in other areas.
The inflation has had effects on our borrowing capacity from the financial institutions. With our mortgage and loan we have benefitted from low inflation, as it has effect of eroding debt. This encourages people to borrow loans from banks and other financial institutions hence rising their standards of living. This too increases the growth rate of the economy as there is a lot of money flowing in the basket of currencies (Giraldo & Trivellato, 2003).
Another effect that we felt as a household with the decreasing trends in the economy was the improved return in the savings. Even with a constant rate of return, the value of savings increased. This situation of reducing inflation encourage investments. It makes it to predict future costs, prices, and wages. In the stable inflation rate, one can even take riskier investments and expect higher growth of returns
Application of Consumer Price Index in Business.
Today, many business managers prefer low and steady rate of inflation compared to zero or negative. Inflation reduces the severity of economic recessions by enabling the labor market to adjust to downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.
The consumer price index may also be used to describe a rising price level within a narrower set of assets, goods and services within the economy. It may also be used to measure an increase in the value of a capital asset. This means that assets manager may rely on CPI to carry out the correct valuation of the businesses’ assets that is useful in determining the net worthy of the business.
Human resource managers may make use of the CPI to make adjustments for the payments paid as wages to the employees. In United States, most workers’ salary is tied to collective bargaining agreements that is closely linked with the CPI. This implies that increase in CPI may cause an increase in wages (Koba, 2013).
Barro, Robert J. (1997). Macroeconomics. Cambridge; MIT press.
Burda, Michael C. (1997).Macroeconomics. Europe; Oxford press.
Giraldo, A., & Trivellato, U. (2003). The Effects of Inflation on Households with Consumption Structure. Universita di Padova.
Hall, Robert E and Taylor, John B. (1993).Macroeconomics. New York. W.W Norton press.
Koba, M. (2013). Consumer Price Index. Retrieved from https://www.cnbc.com/id/43769766
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