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Let us try to understand the practical definition of Global Inflation. In 1967, when McDonald’s launched the Big Mac, it cost just $0.45, but the same Big Mac now costs $5.29. Why? The answer is inflation. To see how fast prices are rising, everything from the prices of leg wax to the cost of a bottle of whisky is closely monitored by statistical bureaus. These price changes are entered into a calculator, and the outcome of one single percentage number is the inflation rate. In a stable economy, prices typically increase by 1% or 2% annually. However, things can sometimes go out of control. In 2008, Zimbabwe’s prices increased every 24 hours. Long ago, the government started printing more and more money. All of them were trillionaires. The situation became so bad that the country ran out of paper to print all the bank notes. Once an inflationary spiral like this begins, it’s almost impossible to get out of, and governments must either devalue their currency.
What is Global Inflation?
Global Inflation is an economic term that refers to the daily increase in the prices of goods and services and common necessities like food, clothing, and housing. As general prices rise, the purchasing power of consumers decreases. It also means that the purchasing power of the currency is falling. As the price increases, the value of a unit of currency decreases because it buys fewer goods and services. This loss of purchasing power affects the cost of living of the general public, ultimately leading to a slowdown in economic growth.
Example:
Compared to twenty years ago, the cost of many consumer products has increased and nearly doubled. Deflation, or falling prices, is the reverse of inflation and happens when the inflation rate falls below 0%.
Is Inflation Good or Bad?
In general, moderate inflation is considered good because it keeps the economy expanding and reduces the risk of deflation. If you are in debt, a little inflation is a good thing. Ask anyone who had a low-interest mortgage before the real estate boom. Inflation also benefits firms when product prices rise more quickly than resource prices. If product prices rise by 4% and resource costs climb by just 2%, revenues will increase at the same rate, which is expanding faster than costs, indicating that profits are increasing for firms across the market.
But it’s bad news for savers: Inflation eats away debt and savings. In 5 years, the products stored in your piggy bank will be less expensive than they are now. If your income does not keep up with inflation, you are becoming poorer. Inflation refers to the average pace at which prices rise. As a result, each percentage point increase in inflation over time reduces the value of our discretionary income. If we keep our money in a bank account or an investment, its worth decreases. If inflation rises beyond expectations.
For example:
If you save $1000 in a savings account that offers a 2% annual interest rate, the interest rate offsets the negative impact of inflation as long as inflation is 2% that year. We lost 2% in purchasing power since the interest rate you earned on your $1000 savings did not match the actual inflation rate. Saving a penny is the same as losing one. This occurs when we fail to account for inflation.
Causes of Global Inflation:
Traditionally, economics would indicate two main causes of global inflation. They are:
- Cost-push inflation
- Demand-pull inflation
Cost-Push Inflation:
Cost-push inflation occurs when a company’s expenses rise and these additional costs are passed on to its customers. So, with cost-push inflation, input or raw material costs rise over time, which could be due to expected or unexpected occurrences such as a natural disaster.
For example:
A good example is what has happened to many of the world’s economies since the lockdowns. As a result, we have seen many disruptions in the supply chain, increased transportation costs, and labour shortages in some places. Much of that will flow into input production prices, which will inevitably lead to higher expenses.
Demand-Pull Inflation:
It happens when the demand for products and services outpaces the supply. This is the result of a robust economy. Demand-pull economies are most likely more representative of situations in which the economy is almost at capacity. When the economy is doing very well, consumers may feel as though they have more money to spend, which could lead to an increase in demand for products and services. Meanwhile, companies that are running at full capacity may not be able to raise their output to meet demand, which could lead to inflation.
For example:
Following the 2008 financial crisis, there was a deflation in housing and personal income and asset inflation in the prices of gold and oil. The demand for gold inflation persisted until it reached a record high.
