WHAT IS INFLATION
Inflation is a sustained increase in the general level of prices. Since inflation is concerned with increases in the general level of prices, changes in the price of a single good or service cannot be characterized as inflation. The inflation rate is normally measured by percentage changes in the cost of a basket of consumer goods and services. In Trinidad and Tobago, the Retail Prices Index is the indicator used to measure inflation.
Inflation, as measured by the change in the overall retail prices index, is sometimes called “headline” inflation. This contrasts with core inflation, which excludes volatile changes in the prices of items like food (and in some countries, fuel).
The inflation rate for the year is measured either by the increase in the average value of the index over the previous year or the December-to-December increase in the index. By convention, the point-to-point increase is more widely used.
DIFFERENT TYPES OF INFLATION
Inflation means a sustained increase in the general price level. However, this increase in the cost of living can be caused by different factors. The main two types of inflation are
Demand pull inflation – this occurs when the economy grows quickly and starts to ‘overheat’ – Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS).
Cost push inflation – this occurs when there is a rise in the price of raw materials, higher taxes, e.t.c
1. Demand Pull Inflation
This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.
Simple diagram showing demand pull inflation
2. Cost Push Inflation
This occurs when there is an increase in the cost of production for firms causing aggregate supply to shift to the left. Cost push inflation could be caused by rising energy and commodity prices....