Inflation and Its Effects
Explain what causes inflation and who is hurt by it.
Inflation is a sustained rise in the general price level.
- Define inflation and deflation.
- Name causes of inflation.
- Explain how inflation affects different groups.
Measuring It
Inflation is measured by changes in the consumer price index (CPI), which tracks the cost of a basket of goods. If the CPI rises by 12% in a year, inflation is 12%.
Causes
- Demand-pull — too much money chasing too few goods.
- Cost-push — higher costs of fuel, transport or raw materials.
- Imported inflation — higher prices of imported goods.
- Money supply growth — too much money in circulation.
Who Is Hurt
People on fixed incomes, pensioners and savers lose purchasing power. Borrowers may benefit if their income rises with prices but their debt is fixed.
A worker earns ₦60 000 a month. With 20% inflation, the same basket that cost ₦50 000 now costs ₦60 000.
The worker can buy less unless their income also rises.
Practice
- Define inflation.
- Explain demand-pull and cost-push inflation.
- Why are pensioners often badly affected by inflation?
Recap
Inflation erodes purchasing power. It can be demand-pull or cost-push, and it hits fixed-income earners hardest.
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Money, Banking and Inflation
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