The Impact of Inflation on The Economy

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Inflation impacts on ordinary people in the streets and businesses alike, when its tentacles stretch they routinely dig deep into consumers’ pockets. It is an economic monster with vampire instincts capable of sucking purchasing power out of decent and hard working citizens.

Inflation is a problem child of unstable economic forces, whenever these forces show signs of fiscal pressure, the prices will mostly likely confirm it in a vertical fashion. The central bank regularly works to bring stability to the economy by pursuing sound fiscal policies, in relation to interest rates and other economic factors.

Monetary policies aimed at boosting economic activity can form part of a government’s action plan in a bid to stem the ills of a run away inflation. This can involve promotion of export activities, and the reduction of import flows – these aspects are prime targets for the authorities due to their capacity to ease the underlying inflationary pressures.

High inflation often hits hard at prices on the output level of the economy, and thus have the potential to lead to a reduction in price competitiveness. Companies on the other hand, usually increase their prices as a way of canvassing themselves from operational losses as a result of general price instability.

Commercial entities come under pressure to balance the competing operational factors within (which include the welfare and/or demands of their employees), and the external pressures.

Conversely, deflation relates to a decline in prices, making it the reverse economic phenomenon of inflation. This kind of monetary development can be triggered by various factors and can unleash a generalized effect in a given economy or an economic sector.

A drop in fuel prices has the tendency of inspiring a comprehensive decline in prices beyond the confines of single economic sector. While some changes come with a specialized element that focus on areas such as the real estate market, or the construction industry, etc.

Economic growth sometimes has the capacity to create real or artificial shortage in the production domain, in relation to demand, which subsequently stimulates inflation. While recession is another economic problem child that tends to usher in the opposite effect, therefore in a way inflation can be viewed as a sign of a robust economy and deflation a sign of fiscal trouble.

Hyper inflation pertains to an acute level of inflation that is out of control in the form of runaway price increases, and has the repercussion of leading an entire economy into the violent storms of a scathing economic downturn.

 

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