Inflation Tutorial by Investopedia. Generally, This Article

¶ … Inflation Tutorial" by Investopedia. Generally, this article seeks to give a concise and clear definition of inflation while highlighting how the measurement of the same takes place and how it impacts upon interest rates and investments. In Investopedia's opinion, "inflation is defined as a sustained increase in the general level of prices for goods and services" (2). Hence an increase in the rate of inflation makes money gradually lose its purchasing power. It is important to note that over time, a number of theories and explanations have been put forward in an attempt to highlight the causes of inflation. These theories include demand-pull inflation and the cost-pull inflation theories (Investopedia 2). When it comes to the measurement of inflation, the same is basically measured in terms of annual percentage increases. In most cases, inflationary rates are regulated through the variation of interest rates. In regard to investments, it can be noted that the impact inflation has on the same is essentially dictated upon by the actual kind of investment under consideration. As Investopedia notes, amongst those affected most by inflation include fixed-income investors (5).

Part 2: Causes and Effects of Inflation

One of the causes of inflation according to Gillespie is "too much demand in the economy" (381). In this case, a sustained growth in demand of goods and services at a faster rate than supply eventually pushes the prices of such goods and services up. This in Gillespie's own words brings about a "demand-pull inflation" (381). The reasoning here is that firms increase the prices of goods and services when they cannot meet the demand in the marketplace. In basic terms, long queues and waiting lists, low stock levels as well as shortages characterize demand-pull inflation. Secondly, inflation according to Macdonald can also be brought about by sustained cost increases. In Macdonald's own words, "this type of inflation is referred to as cost-push or supply-side inflation" (229). In this case, it is the increasing production costs that trigger inflation. Here, the increasing costs are not usually accompanied by productivity gains. Faced with raising costs, businesses revise their prices upwards so as to remain profitable.

When it comes to the effects of inflation on an economy, Gillespie is of the opinion that the same "can cause a number of problems for an economy" (385). To begin with, inflation can affect the competitiveness of the nation's products hence significantly reducing its foreign export earnings. As Gillespie notes, when for instance the prices of goods produced by firms in the UK keep on rising, the competitiveness of such goods in the international markets in relation to those of other countries is affected (385). Secondly, increasing rates of inflation are accompanied by what is referred to as 'menu costs' for firms in an economy. This is to say that firms in such an economy have to constantly incur costs of adjusting their promotional items so as to reflect the price variations. Next, as Gillespie points out, inflation may bring about a redistribution of real incomes (385). The reasoning here is that with an increase in inflation, employees may be forced to ask for an increase in wages. However, not all employees have the power to successfully lobby for an increase in wages. Indeed, the ability of employees to successfully lobby for the same is determined by how much they are needed and the power of the trade unions they are subscribed to. With this in mind, some employee groups may hence have their salaries varied in line with the prevailing inflation rates while others may fail to successfully lobby for the same. This is what Gillespie regards as redistribution of real incomes within an economy (385).