How is inflation caused

how is inflation caused

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the best example i can think of for inflation (and i hope I'm right i haven't studied this for years) is during the wars, especially WW2, some governments started to print tonnes and tonnes of money thinking it would cure the debt for the country. it ended up in recession which is what i think is the opposite of inflation. i have seen pictures where people are carting wheelbarrows of money to buy groceries.

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economics, inflation is simply an increase in the general price level.

The two most obvious versions of this, each held by some economists to be "real" inflation, are for prices of goods and services in the currency in question to rise, or for the government to increase the money supply, other than to replace old money it destroys.

Price inflation is closely akin to "cost of living" measurement, where a "basket" of goods, and comparing the prices at two intervals, and adjusting for changes in the intrinsic basket. But, technically, this is not raw inflation; it is an attempt to determine real-life value of money compared to the members of the society in question, adding other factors like increased expectations.

Raw inflation measurement does not adjust for expectations, but directly measures the change in the price of goods.

There are different measurements of price inflation, depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators, or price indexes. The last measures inflation in the entire economy.

General price inflation is a fall in the purchasing power of money within an economy, as compared to currency devaluation which is the fall of the market value of a currency between economies. It is referred to as a rise in the general level of prices. The former applies to the value of the currency within the national region of use, whereas the latter applies to

the external value on international markets. The extent to which these two phenomena are related is open to economic debate, though the comparison of a currency to foreign currencies is based on investor demand for currencies, and therefore must at least partially be a matter of perception.

Both of these are often caused by a government adding too much money to an economy, as by printing it or lending/selling virtual money to banks or other entities. This is called currency inflation, and is more often than not the cause of any severe price inflation or currency devaluation. But, because the general amount of wealth gradually increases in an economy (as long-lasting things are created, new technologies invented, et cetera), a small amount of currency inflation is actually necessary to keep prices stable, and need not cause price inflation.

Some terms related to inflation:

deflation is a rise in the purchasing power of money, and a corresponding lowering of prices (the opposite of inflation).

Disinflation refers to slowing the rate of inflation, that is, prices are still rising, but at a slower rate than before.

Reflation is a term used to denote inflation after a period of deflation, meaning inflation designed to restore prices to a previous level.

Hyperinflation is rapid inflation without any tendency towards equilibrium - that is, an inflation that produces even more inflation.

In some contexts the word "inflation" is used to mean an increase in the money supply, which is seen as a cause of price increases. Some economists (of the Austrian school) still prefer this meaning of the term, rather than to mean the price increases themselves. Thus, for example, some observers refer to inflation in the 1920s in the United States even though the prices of some baskets of goods were not increasing at the time. Below, the word "inflation" will be used to refer to a general increase in prices unless otherwise specified

Source: answers.yahoo.com

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