To What Extent is Inflation a serious Economic Problem

To What Extent is Inflation a serious Economic Problem

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Before considering whether Inflation has serious Economic Problems, we

have to get to grasp what it exactly is. Inflation is defined as a

sustained general rise in prices in the Economy. Obviously the

government can't measure every single price change for every single

good in the economy, so therefore they take a basket of goods and by

using a price index measure a change in it. The basket of good has a

representative range of goods and services and it needs to be recorded

at a regular basis, to measure how inflation is changing. The UK

government currently use the RPI (Retail Price Index) as a measure,

which measures, in theory, each month, 150 000 prices for 600 items.

Surveyors are sent out to a random set of households and measure it on

the same day of each month to record a fair reading. The goods and

services in the basket of goods are also weighted, which means the

goods and services which use the most household spending are more

important than the goods and services which use the least and

therefore the larger proportion of total household spending has the

largest weight. This all makes the measure of Inflation more accurate.

However, although inflation is a useful measure for the government, as

they can see how the general price level affects other economic

factors, it still is considered to be a problem. The higher the rate

of inflation the greater the economic cost is what economists see and

the reasons for this follow.

Stable prices give the consumer a general idea of what a fair price is

for a product and which suppliers charge the least for them. With

inflation being high, both...

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...vernment are uncertain what

the rate of inflation will be in the future. When planning they

therefore has to estimate as best they can the expected rate of

inflation. To mitigate the effects of inflation the government uses a

process called INDEXATION, which allows inflation to be anticipated.

This gets rid of some of the costs of inflation however causes some.

The indexation builds in cost structures, such as wage increases,

which reflect past changes in price.

I have looked at a range of aspects involved with inflation and what

the costs to the economy are when the scenarios are different,

hyperinflation, sustained low inflation etc. and I conclude that

inflation will always have some costs if it is both high and low, but

higher inflation, which could lead to hyperinflation has more costs to

the economy and therefore causes a greater economic problem.