What is Inflation?
In general terms, inflation is simply when everything gets more expensive. It is a general increase in prices for everything in the economy. This means that businesses have to spend even more money on the same amount of goods and services. Aside from that, this gradual increase in prices also corresponds with a decrease in the purchasing power of money.
In Canada, economists calculate the rate of inflation by using the Consumer Price Index (CPI). Essentially, it compares the overtime cost of a basket with fixed items, based on the average consumption of a Canadian Citizen. When calculating the total price of this basket one year, and comparing it to the price of this basket the next, the difference would be the inflation rate. The higher the CPI, the more the prices have been inflated.
Inflation is caused when the demand in the economy overtakes supply. Many factors can lead to this, such as supply chain issues, disruptions in supply, an increased demand, global issues such as the pandemic, and much more. A prime example of this can be the pandemic. Many businesses have been impacted and affected by this pandemic for the previous two years. In hopes to catch up, businesses wished to produce and supply more products. This caused a rapid increase in demand for goods and services, without giving the suppliers enough time to catch up. Another factor that could lead to inflation could be lower interest rates and higher government spending. When businesses have more access to money, cause people to take advantage of cheaper rates, causing a higher demand.
How to Fight Inflation
Fighting inflation is generally the country’s central bank’s responsibility. The bank of Canada is legally mandated to “promote the economic and financial welfare of Canada.” The bank uses its tools to maintain the target rate of inflation. One strategy the bank uses is called Quantitative easing, where they use financial assets to lower the interest rates for bondholders. A second strategy is to lower interest rates to increase spending.
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