Inflation Is Very, Very Low. Time to Worry?

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Inflation is very, very low. Time to worry? In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. Different economists have defined the term ‘inflation’ in different ways. Basically inflation can be defined in two ways. Earlier writers based their definition on the well known Quantity theory of money and explained inflationary trends in prices in terms of an increase in the supply of money. Irving Fisher is of the view that the prices are affected much more by the supply of money than by supply of goods. The second approach of inflation has been put forward by economist like Wicksell, Bent Hansen and J.M. Keynes. According to this approach, “general price level is determined by the total demand for and total supply of the group of goods concerned, the prices of which determine the general price level”. Economists generally agree that high rates of inflation are caused by an excessive growth of money supply. Views on which factors determine low or moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by the money supply growing faster than the rate of economic growth. Today, most economists favors a low and steady rate of inflation, low inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a down turn, and reduces the risk that a liquidity trap

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