Financial Glossary: Inflation


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Inflation

Inflation

A rise in the general price level of goods and services; inflation is the opposite of deflation. The Consumer Price Index and the Producer Price Index are the most common measures of inflation.

Mainstream economists believe that High rates of inflation are caused by High rates of growth of the Money Supply.Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in Scarcity), and sometimes to changes in the supply or demand for money.

In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the "monetarists" argued that Money Supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the Money Supply.

There are many measures of inflation. For example, different price indices can be used to measure changes in prices that affect different people. Two widely known indices for which inflation rates are reported in many countries are the Consumer Price Index (CPI), which measures consumer prices, and the GDP deflator, which measures price variations associated with domestic production of goods and services.

In the UK, the Benchmark of inflation is the Retail Price Index (RPI). This is used to measure the cost of a 'basket of goods and services' representing the average household's purchases.

Inflation is a persistent threat to savers, partly because the erosive effect it has on savings is 'unseen'. In order to make 'real' gains on your investments, the first task is to make sure your returns beat the rate of inflation. Index-linked products, which pay an Interest rate that keeps pace with inflation, are one solution.

Posted by Privatebanking.com

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