Inflation
Inflation is the economic condition characterized by continuously rising prices for goods and services. As a result, the purchasing power of a country's currency deteriorates as its value decreases and interest rates rise.
What exactly causes inflation and how does it affect your investments and standard of living? See the tutorial: All About Inflation
for the answers

There are two generally recognized types of inflation: demand-pull inflation and cost-push inflation.

  • Demand-Pull Inflation: The money supply is seen as the cause of this type of inflation. In this situation, the money supply is too large when compared with the supply of produced goods in the economy. Interest rates rise as a result, making it more expensive to borrow money. As a result, the money supply begins to shrink with the drop in lending activity.

  • Cost-Push Inflation: The rising cost of raw materials used to produce goods is seen as the cause of this type of inflation. Since manufacturers now need to pay more for these materials, they raise the prices on their products to compensate. As a result, retailers must pay more for goods, so they increase prices to pass the difference on to the consumer.

Deflation
Conversely, deflation is a persistent decline in the prices of goods and services usually caused by slowing market demand with a level supply. Purchasing power increases as a result of stagnant demand, fixed-income securities become more appealing, and producers must lower their prices to compete for the limited demand.

Inflation usually has a negative effect on security prices, especially those equities that are particularly interest-rate sensitive, such as financials, smaller companies that rely on debt financing to grow, and cyclical businesses such as durable goods like heavy machinery, automobile and steel manufacturers, and other capital goods industries.

Exam Tips and Tricks
You should understand the fundamental causes and effects of both inflation and deflation. Be prepared to address the effects
of each economic environment on the price of securities and on interest rates.



Monetary Policy

Related Articles
  1. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  2. Insights

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  3. Trading

    Explaining Demand-Pull Inflation

    In demand-pull inflation, the demand for goods increases ahead of the supply.
  4. Insights

    Defining Cost-Push Inflation

    Cost-push inflation is caused by an increase in the cost of production, due to higher prices for raw materials or labor.
  5. Insights

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
  6. Insights

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  7. Insights

    What is Deflation?

    Deflation is an economic term used to describe a period of declining prices for goods and services. Decreases in the money supply, government spending, consumer demand and business investment ...
  8. Insights

    The Dangers Of Deflation

    We look at what life would be like in a deflationary environment, and what you can do to protect your investments.
Frequently Asked Questions
  1. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  2. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
  3. What is the Difference Between a Forward Rate and a Spot Rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ...
  4. What are Some Examples of Stratified Random Sampling?

    Learn what simple random sampling and stratified random sampling are, some examples of stratified random samples, and how ...
Trading Center