Inflation

Inflation is and has been a highly debated phenomenon in economics. Even the use of the word "inflation" has different meanings in different contexts. Many economists, businessmen, and politicians maintain that moderate inflation levels are needed to drive consumption, assuming that higher levels of spending are crucial for economic growth.

Understanding Inflation

Inflation is often used to describe the impact of rising oil or food prices on the economy. For example, if the price of oil goes from $75 a barrel to $100 a barrel, input prices for businesses will increase and transportation costs for everyone will also increase. This may cause many other prices to rise in response.
However, most economists consider the actual definition of inflation to be slightly different. Inflation is a function of the supply and demand for money, meaning that producing relatively more dollars causes each dollar to become less valuable, forcing the general price level to rise.

Key Takeaways

• Inflation, in the basic sense, is a rise in price levels.
• Economists believe inflation comes about when the supply of money is greater than the demand for money.
• Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth.
• Some believe inflation is meant to keep deflation in check, while others think inflation is a drag on the economy. 

When Inflation Is Good?

When the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand.

Inflation also makes it easier on debtors, who repay their loans with money that is less valuable than the money they borrowed. This encourages borrowing and lending, which again increases spending on all levels. Economists once believed an inverse relationship existed between inflation and unemployment, and that rising unemployment could be fought with increased inflation.