Price-Forced Effect
The cost-push effect occurs when price increases drive Inflation rather than demand. If the money supply for a particular commodity or other market asset is raised, manufacturing costs will rise, resulting in a price increase for the final product. This could be oil price increases, natural disasters, wars, or supply chain and logistics interruptions.
Internal Inflation
This is when individuals expect the current rate of Inflation to continue; they anticipate that prices will continue to grow at the current rate. Consequently, this price increase would be factored into pay negotiations or contract price revisions. These contractual commitments will increase prices when the subsequent periods occur, thus self-fulfilling the inflation rate.
How is the rate of Inflation measured?
To standardize and quantify Inflation, government agencies must analyze and monitor the price rises of a basket of regularly used goods and services. This can include rent or mortgage payments, grocery bills, and even medical bills. The price of this bag is then compared to a base year, and the percentage rate of change is determined to represent Inflation.
Conclusion
Inflation can be both beneficial and detrimental. If Inflation is caused by increasing demand or economic expansion, it might be regarded as positive. Increased wages, corporate development, and innovation investment expenditures. However, if Inflation is caused by a supply shock or a sudden devaluation of the currency, and if wage growth is unable to keep pace with Inflation owing to sluggish economic activity, this can have devastating effects on households, as was the case in Zimbabwe in 2008 and Sri Lanka today. Policymakers and central banks evaluate the level of Inflation to ensure it is appropriate. The central bank will boost the money supply or reduce interest rates, and policymakers will reduce tax levels, to reduce or enhance Inflation, respectively. Investors should also consider Inflation when considering asset location and forecasting market volatility. During periods of high Inflation, there are asset classes, such as gold, whose prices climb at the same rate as Inflation. During periods of low Inflation and low-interest rates, stock market typically do better. Therefore, Inflation is entirely context-dependent.
