Inflation in Canada
Recessions 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.