Definition of inflation rate
Inflation is the rise in the price of products for general consumers which in turn affect the cost of living of a normal consumer. The rate of inflation increases when the country which you live in prints money without keeping a track on the value of currency, which if in case falls can cause greater rate of inflation to that country. To recover the market, the government is forced to charge more for every commodity that is sold.
Many consumers face problems due to this rise in price for basic products like soaps, tissues, and many other such basic essentials that can cost you so much that you look for a rise in your pay to meet these basic needs. Inflation in general disturbs the whole economy. The Inflation rate is calculated every month based on the Consumer Price Index (CPI).
How to calculate inflation rate?
For example, if the Inflation rate the previous month say is 100 and say in the current month it is 105, the change in rate of inflation would be 5% that is the Consumer Price Index has been increased by 5%. The comparison is always with the previous months index or the original. We can arrive at that answer by dividing the increase by the original price that is 5/100, arriving at the result .5 inflation. Inflation is always displayed as a percentage which is why we should multiply the answer with 100 to have an answer of 5%.
Impact of inflation rate on the economy
When Inflation rate increases you would find yourself spending more than usual and you would also notice that it does not suffice. The increase in expenditure for basic commodities is a hint in itself that there is a rise in the inflation rate and the economic growth of the country slows down so that this rate can be controlled.
With the rise in inflation rate even your investments get affected and your long term plans with your investments seem to waiver for a bit. The inflation rate affects the rates of interests on returns of your investments and if you do not take timely action to control your investments you could face losses. Borrowing from the federal government to overcome these unexpectedly high expenses can bring about a bit of normalcy into the market, by providing consumers with enough loans to overcome their expenditure.
The federal government can make use of fiscal policy that helps in adjusting the tax and other expenses on commodities in order to moderate the economy.
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