Inflation

About thirty years ago, for many Chinese families, their dream is to have ten thousand yuan in their bank account. If someone had those money, they definitely were very rich. But now, even the person has one hundred thousand yuan in the bank account, he/she is still far away from a rich person. The value of money falls a lot. Economist generally agree it is caused by inflation.

According to the Wikipedia, inflation refers to a rise in the general level of prices of goods and services in an economy over a period of time (wiki online). It occurs in almost every country.

There are many causes for inflation. The major one is an excessive growth of the money supply. It is usually due to the government print an excess of money to deal with a crisis, such as a civil war in US. Manufacturing money out of thin air eventually puts more money in the ordinary person's pocket. Consumers tend to spend too much. As a result, prices end up rising to keep up with the currency surplus.

Another cause of inflation is production costs raise rapidly. For example, if fuel price increased, the transport cost of materials would have increased. It leads to the company increasing final prices to maintain steady profits. Company usually chose to pass on the burden to the consumer. The increasing on federal product taxes and labor wages are another factors effect production costs.

Inflation also can be caused by international lending and national debts. When the government borrows money, it has to deal with interests, which in the end cause prices to rise. A deep drop of the exchange rate can also result in inflation, because the government will have to deal with the differences in the import and export.

Now, most economists favor a low steady rate of inflation. low inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn. However, any rise at an unsustainable level will certainly have a bad impact on the economy.

The progressive rise of inflation makes the borrowers to be less willing to use the money as standard differed payments. For example, if you lend out $100 and will get $110 next year, can you still get the same thing using $110 next year as what you spend $100 to get now? The financial organizations will be less willing to loan out money. On the other side, debtors who have debts with a fixed rate of interest will get the benefit from high inflation rate.

If inflation is very high, money is no longer an effective means of exchange. The economies have to go to tricky trades. Companies hard to budget or plan long term project. Uncertainty about the future purchasing power of money discourages investment and saving.

Inflation also could impose hidden tax increases. People will be taxed a higher percentage if their income increases following an inflation increase.

Therefore, every government tries to keep the rate of inflation low and stable.