With the increasing food and energy prices, “Inflation” is one of the many common words used in expert discussions along with the words such as “Globalization”. But I’m sure there are lots of us who don’t really understand what is exactly meant by inflation and what causes inflation. In this short article, let’s have a look at the global phenomena which affects all of us.

In laymen’s terms, inflation means the increase of the price of goods and services over time. This is usually measured as percentage of change and subjected to a period of one year duration. But what really causes inflation? There are two strong arguments on the table for this historic question. There were two groups of economists in the world who represent two different arguments on this issue. One group, the “monetarists” argued that the high inflation is caused by oversupply of money in to the world economy. The other group, “Keynesians” contra-argue that the high inflation is caused by the actual demand for the goods and services.

Usually, there are price indices that are used for measuring the rate of inflation. There are two widely accepted and used price indices: Consumer Price Index (CPI) and Gross Domestic Product deflator (GDP deflator). Latter is more focused on price variations associated with domestic production of goods and services. Cost-of-Living indices are another set of indices used for determining the inflation rate. Above indices are used as applicable to each condition and each area of the economy.

Although we say lots of bad things about inflation, it also has its bright sides to it. Usually inflation in small rate is considered healthy for economies as it results competition. With a lower inflation, prices of the goods and services may rise slowly, therefore both consumers and service providers would choose to buy sooner than later. This has an affect on keeping the economy active and competitive by encouraging spending and borrowing. It also has a long term affect that it encourages investments. When it comes to the negative side of inflation, there are many. With high inflations rates, some of the economies may go in to depressions collapsing the entire economical system of a country.