Different Perspectives on Inflation – Western World and Emerging Economies

Finance 1Inflation is a sustained increase in the aggregate or general price level in an economy. Inflation means the increase in the cost of living. It is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. During inflation, an increase in the level of consumer prices or a persistent decline in the purchasing power of money occurs.Experts say that there are three main causes of inflation.

Demand-pull inflation is the most common. It’s simply when demand for a good or service increases so much that it outstrips supply. A growing economy can create this kind of inflation as people feel confident about the future and spend more. The second cause of inflation is cost-push inflation. This isn’t as common as demand-pull inflation because it only occurs when there is a shortage of supply combined with enough demand to allow the producer to raise prices. This type of inflation is mostly occurring now in emerging economies and most of the developing world. The third cause of inflation is an over-expansion of the money supply. The money supply is not just cash, but also credit, loans, and mortgages. It is the intent of the central banks in the western world to create additional inflation through this route at the present moment.

In the current environment, rampant inflation is less of a worry in most of the western world. However developing countries and emerging economies are grappling with widespread inflation and associated issues. Analysts say that there are a lot of reasons behind this. Capacity constraints and lack of infrastructure are cited as major problems along with the regulatory red tape. It remains to be seen whether emerging economies can provide suitable social and associated structures which will enable most of its citizens to benefit from technology and economic enhancements.

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