Inflation Cause, Effects and Remedies

11309 Words46 Pages
It’s causes, effect and remedies.
By: Subrat Choudhury

Inflation and Deflation
Inflation and Deflation, in economics, terms used to describe, respectively, a decline or an increase in the value of money, in relation to the goods and services it will buy. Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply
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Economic historians have identified the 16th to early 17th centuries in Europe as a period of long-term inflation, although the average annual rate of 1 to 2 percent was modest by modern standards. Major changes occurred during the American Revolution, when prices in the U.S. rose an average of 8.5 percent per month, and during the French Revolution, when prices in France rose at a rate of 10 percent per month. These relatively brief flurries were followed by long periods of alternating international inflations and deflations linked to specific political and economic events. The U.S. reported average annual price changes as follows: 1790 to 1815, up 3.3 percent; 1815 to 1850, down 2.3 percent; 1850 to 1873, up 5.3 percent; 1873 to 1896, down 1.8 percent; 1896 to 1920, up 4.2 percent; and 1920 to 1934, down 3.9 percent. This extended history indicates a recurring sequence of inflations, linked to wartime periods, followed by long periods of price stability or deflation. Consumer prices accelerated during the World War II era, rising at an annual average rate of 7.0 percent from 1940 to 1948, and then stabilized from 1948 to 1965, when the annual increases averaged only 1.6 percent, including a peak of 5.9 percent in 1951 during the Korean War. In the mid-1960s a chronic inflationary trend began in most industrial nations. From 1965 to 1978 American consumer prices increased at an average annual rate of 5.7 percent, including a peak of
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