What is Inflation? What Are the Effects of Inflation? How is Inflation Calculated?

what is inflation what are the effects of inflation how to calculate inflation
what is inflation what are the effects of inflation how to calculate inflation

Inflation refers to the decrease in the purchasing power of money due to the increase in the price level of goods and services. The impressive factor here is not only the increase in the prices of certain goods or services, but the decrease in purchasing power as a result of the increase in the general price level of goods and services. Another factor that should be considered is that inflation is not a one-time increase in the prices in question, but a continuous increase in this increase.

To give an example to better understand the concept of inflation, let's assume that the amount you spent on your grocery shopping a year ago was 50 TL. If you can buy the same products from the market for 100 TL a year after this shopping, this is an indication that the annual inflation is quite high. In other words, this shows that the purchasing power decreases with the increasing goods prices within a year.

What Are the Types of Inflation?

There are types and sub-types in which the concept of inflation is separated. We can list the types of inflation as follows:

Types of inflation according to the rate of increase in prices:

  • Moderate inflation: It is a term used for situations in which general price increases occur at low levels and inflation expectations do not occur. Moderate inflation can also be called creeping inflation. This kind of inflation, which may point to a different rate for each economy depending on time and place, will not have negative effects on the economy.
  • High inflation: This inflation is a type that can hurt the economy. In this type of inflation, the functioning of the markets may deteriorate, there may be high uncertainties about the future, and the feature of money as a measure of value and a means of saving may be greatly weakened.
  • Hyperinflation: It is a type of inflation that occurs at a very high rate. The characteristic of hyperinflation, which causes money to lose its functions, is that market transactions are made in foreign currency, not in national currency, and collapse the national monetary system. It usually occurs during periods when the country is going through very severe conditions and these countries may have to switch to a new currency.

Types of inflation according to their reasons:

  • Demand inflation: Demand inflation occurs when the aggregate demand level exceeds the supply and causes prices to rise continuously.
  • Cost inflation: Cost inflation occurs with the continuous increases in prices as a result of the increase in the costs of goods and services, which are the inputs of production. Another factor in the formation of this type of inflation may be that companies want to increase their profit rates. Although the labor, raw material and input costs used by firms in production are fixed, the increase in prices with the aim of profit causes inflation.
  • Structural inflation: In imperfect competition markets, some situations such as high profit margins of firms or delay of supply in responding to demand lead to structural inflation.

What Are the Effects of Inflation?

High inflation has many negative consequences for the country, either temporary or permanent. Some of those:

  • Increasing income distribution injustice,
  • Increase in borrowing costs,
  • Decline in real income,
  • Decrease in the tendency to save and decrease in investments,
  • Job uncertainty.

How is Inflation Calculated?

While calculating the inflation, official statistical institutions are used. In determining the levels of inflation in Turkey it is utilized statistical agency Turkstat. Official statistical institutions make monthly examinations in order to observe price changes in markets, gas stations, doctor's offices, service providers and many similar areas. Inflation calculations are made with the indices created. The two most basic indices used are;

  • Consumer Price Index (CPI-CPI),
  • Domestic Producer Price Index (D-PPI-D-PPI).


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