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This Essay Is About Inflation In Canada

970 words - 4 pages

Inflation in CanadaRecessions and unemployment are trouble enough, but many people in the modern world see a danger in too much prosperity. The danger is inflation. Inflation is defined as an increase in the average price level in the economy. The amount of inflation is measured by the consumer price index (CPI) and producer price indexes (PPI). As inflation goes up, there is a decline in the purchasing power of money (Investopedia, 2002, P.2).Thinking in terms of supply and demand, price inflation could be caused in one or both of two ways. Prices in general would only rise if supply decreases or demand increases. When demand increases and this causes inflation, this is described as demand-pull inflation. On the other hand, when cost increases and this causes supply to decrease in turn, and this result in inflation, we described it as cost-push inflation. A demand-pull inflation would lead to cost increases, which then lead to further cost-push inflation (William-king, 1997, P.1).Economists argue inflation as a problem in the economy. It is proven that inflation creates uncertainty, in that people do not know what the money they earn today will buy tomorrow. Uncertainty, in turn, discourages savings and investing. Inflation is also said to be a hidden tax on "nominal balances". That means people who hold bonds and bank accounts in dollars lose the value of those accounts when inflation occur, just as if their money had been taxed away (William-king, 1997, P.2).Hyperinflation and stagnation are the other two types of inflation that are very negative to the economy. Stagnation is a combination of high inflation and high unemployment. It might be caused if fewer people choose to work and plus inflation is happening. Hyperinflation refers to a very rapid, very large increase in the price level. It is caused by extremely high inflation and it can possibly breakdown a country's monetary system (William-king, 1997, P.4).Most people think inflation is bad, but this isn't necessarily the case. If the inflation rate turns out to be what the majority of people are expecting (anticipated inflation), and then the cost isn't high. For example, banks vary interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up. Inflation shows that an economy is growing, so in turn, deflation indicates the economy is weak. As seen, it's not easy to determine whether inflation is either good or bad, it depends on the overall economy (Investopedia, 2002, P.3).The big problem is unanticipated inflation. In this case, there are a number of issues. Creditors lose and debtors gain if the lender does not anticipate inflation correctly. The people living off a fixed-income such as retirees see a decline in their purchasing power. Finally, if the inflation rate is greater than that of other countries, local goods become less competitive (Investopedia, 2002, P.3).The tragic events in New York led to...

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