Inflation

INFLATION - CAUSES AND EFFECTS

Older people often talk about how cheap things were when they were young. A brand new car may have cost only $5,000 compared to $20,000 today, or petrol that costonly a few cents in the 60s costs over a dollar today. Inflation happens when money loses some of its value. We measure the rise of inflation in percent. For example, 2% inflation means that a $1 bottleof milk will cost $1.02 next year.

1 Causes of Inflation

Inflation has many causes. In times when the economy is good and people have enough money they want to buy more products than factoriescan produce, so the prices go up.
Inflation can also happen when worker’s demand more money or when the raw materials that producers need rise in price. The end product becomes more expensive and hasto be sold at a higher price.
Some economists say that central banks do not do enough to control how much money there is in a country. There may be more money around than there are goods. Consumerswant to buy more products, the demand gets higher and prices go up. Sometimes low interest rates on loans make people borrow money to buy houses or cars. These prices go up as well.
Inflation is notproduced by one country alone. Sometimes a country cannot control the prices of certain goods as it would like to. A country that does not have any energy supplies of its own has to import energy. Ithas to pay a high price for oil and gas.
Inflation in the past happened in times of crisis, war or conflict. Governments printed too much money and didn’t have the goods that people could buy. Thishappened in the final years of World War II. By the end of the war the German currency was not even worth the paper on which it was printed.

2 Effects of inflation

Inflation is a sign that theeconomy is growing. It is normal when prices go up only a few percent every year. High inflation, on the other hand, leads to uncertainty in the population.
Industries may not want to borrow money...