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INFLATION

Article · April 2019

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Maram Ibrahim
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INFLATION
By: Maram Ibrahim

APRIL 30, 2019

What is inflation?
Inflation is the long term increase in prices of services and goods due to the
devaluation of currency. Even though inflation is a bad thing, it might be a good
thing to entrepreneurs. Usually, high inflation rate problems arise when the
unexpected increase occurs. If incomes don’t increase as the inflation increases,
everyone’s purchasing power will be effectively reduced which in turn leads to a
stagnant or slow economy.
In other words Inflation, as mentioned, essentially how much the dollar is
worth at a given moment with regards to purchasing. The idea behind inflation
being a force for good in the economy is that a manageable enough rate can spur
economic growth without devaluing the currency so much that it becomes nearly
worthless.
Also, Inflation is a quantitative measure of the rate at which the average price
level of a basket of selected goods and services in an economy increases over a
period of time. ... Often expressed as a percentage, inflation indicates a decrease
in the purchasing power of a nation\s currency.
Why does inflation occur?
Demand-pull inflation occurs when aggregate demand for goods and services in
an economy rises more rapidly than an economy\s productive capacity. One
potential shock to aggregate demand might come from a central bank that rapidly
increases the supply of money.
Everyone knows that national debt is a bad thing. However, did you know that,
over time, it can cause high inflation rates? If the national debt increases, the
country has two options; raise taxes or print more money to pay off the debt. If
taxes are increased, businesses will react by increasing prices in goods and
services. The latter will automatically lead to an increase in inflation as discussed
above.
Exchange Rates
If a country increases the exposure to foreign marketplaces, its inflation will
become worse.

Cost-Push effect
This is an economy theory that tries to explain what drives up the prices of
consumer goods and services. This theory states that when companies faced with
increased input costs like raw materials, they will retain their profitability by
passing this increased cost of production onto consumers in the form of higher
prices.

Types of inflation:
There are many different types of inflation, depending not only on what good is
being priced but what the inflation rate actually is. For example, what happens if
the inflation rate is well above the Fed\s intended target? At a higher rate, yet still
in the single digits, that\s known as walking inflation. It is seen as concerning yet
manageable.

There are three major types of inflation:

1. Demand pull inflation: inflation from high demand for goods and low
unemployment.

2. Cost push inflation: inflation caused by sudden decrease in the supply of goods,
which would increase goods prices. Producers for these goods will increase the
costs could then pass this on to consumers in the form of increased prices.

3. Anticipated: Prices rise because people expect them to rise.

How Is Inflation Measured?

How can you measure inflation as a single number when so many different goods
and services exist? It\s not easy. The U.S. government has a couple of different
methods for calculating the current inflation rate:
Consumer Price Index
Effects of Inflation: How Does It Affect You?
The impact of inflation affects many different groups when it hits. Not every group
is affected the same way. Who benefits from inflation, and who doesn’t?

Generally in a period of mild inflation, job-seekers can benefit. Increased spending

can mean increased demand, and companies may decide to hire new employees to
better manage the new demand. If you have borrowed money from a lender,
inflation could be convenient for you. With the currency devalued, what you
borrowed a year or two ago is now the equivalent to a lower amount of money.

In this assumed manageable level of inflation, businesses that sell goods and
services can benefit as well. A healthy amount of inflation is said to increase and
incentivize spending more; at its best, that can work in a way that the increased
costs are offset by an increase in sales.

An unhealthy, unmanageable level, however, is disastrous for nearly everyone. If

inflation spirals out of control, people lose faith in their currency. Financial
institutions suffer as people pull their money out of them. Businesses suffer as their
goods become too expensive for most people.
Those with low incomes and fixed incomes suffer in any level of inflation. The
value of a currency goes down, but incomes haven\t necessarily risen. If someone\s
yearly income is only $25,000 and the inflation rate from one year to the next is
2%, that salary is now the equivalent to what $24,500 was the year prior.

Inflation has a major effect on the entire country\s economy. It impacts not only
the government, but the little things in the average person\s daily life. Both a cause
and effect of how the economy is doing, inflation has both its fans and detractors.
Many think that certain amounts of inflation are good for a thriving economy, but
that larger rates raise concerns. It can devalue the currency significantly and, at
worse, has been a key component to recessions.

effects of inflation
Rising prices, known as inflation, impact the cost of living, the cost of doing
business, borrowing money, mortgages, corporate and government bond yields,
and every other facet of the economy. Inflation can be both beneficial to economic
recovery and, in some cases, negative.
How does inflation affect companies?
When prices rise for energy, food, commodities, and other goods and services, the
entire economy is affected. Rising prices, known as inflation, impact the cost of
living, the cost of doing business, borrowing money, mortgages, corporate and
government bond yields, and every other facet of the economy.

Impact of inflation on business

A small increase in inflation can hurt the capital expenditure and increase the cost
of production in a company. However, when controlled, inflation can act as a
healthy stimulus for the economy. Larger corporations can handle the effects of
inflation while small firms often take a direct hit. High inflation rates can also have
an adverse impact on currency exchange rates which will eventually result in an
export slump.
How to defeat inflation
To entrepreneurs, beating inflation is very easy. If inflation stays for a longer period than
expected in the market, you are more likely to notice it. If you didn’t plan for it, you might
realize that your savings aren’t enough to enable you to reach your goals

What do you mean by hyperinflation?

Definition: Hyperinflation is a rapid and often uncontrollable currency devaluation causing the
prices of goods and services to skyrocket in a short period of time

Why is hyperinflation bad?

In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes
the real value of the local currency, as the prices of all goods increase. This causes people to
minimize their holdings in that currency as they usually switch to more stable foreign currencies,
often the US Dollar.

Example of inflation:

By 2014, Venezuela had entered an economic recession and by 2016, the country had an
inflation rate of 800%, the highest in its history. The International Monetary Fund expects
inflation in Venezuela to be 1,000,000% for 2018.

There, inflation has been the largest in the world for the past three years. ... Both political and
economic reasons are causes of rapid acceleration of inflation in Venezuela: On the political
front, shortages of food, medicine, electricity and other necessities are causing riots and political
instability.
Hyperinflation starts when a country\s government begins printing money to pay for its
spending. As it increases the money supply, prices rise as in regular inflation. An increase in the
money supply is one of the two causes of inflation. ... That excessive demand aggravates
inflation.
The conclusion:
Relationship between inflation and entrepreneurship:1
There is a long tradition of linking entrepreneurship to economic growth. ... When
entrepreneurship is the driving force of long run economic growth, inflation can increase growth,
while its impact on output at given productivity level. This channel is novel and has many
testable implications.

Why would Inflation decrease?

Deflation, or negative inflation, happens when prices fall because the supply of goods is higher
than the demand for those goods. This is usually because of a reduction in money, credit or
consumer spending.

Is high inflation good for entrepreneurs and small businesses?

Interest rates will never remain low forever. This is what small businesses and entrepreneurs fear
most. If the interest rates increase, small businesses will require more funds to produce goods
and services. However, rising interest rates can be a good thing to entrepreneurs and here’s how:

More funding options

Low-interest rates tend to tie lenders hands. Without much spread (the difference between loans
and interest rates), most banks and lenders become less willing to take riskier loans. On the other
hand, high-interest rates encourage banks to give loans to small businesses.

The chance to increase prices

When inflation is small, there’s a lot of capital. However, if it increases, production costs
increase, and this gives entrepreneurs an opportunity to raise prices for their goods and services.

Beating inflation is not that challenging to entrepreneurs. With the best tools at hand, you can use
investing to beat high inflation rates.
Small businesses are facing many economic, sociocultural physical/emotional problems that
might hinder their ability to become effective entrepreneurial businesses.

1
Al-Awlaqi, Aamer, and Habtoor, “The Effect of Entrepreneurship Training on Entrepreneurial Orientation:
Evidence from a Regression Discontinuity Design on Micro-Sized Businesses.”
 Refernces:
Al-Awlaqi, Mohammed Ali, Ammar
Mohamed Aamer, and Nasser Habtoor.
“The Effect of Entrepreneurship Training
on Entrepreneurial Orientation: Evidence
from a Regression Discontinuity Design
on Micro-Sized Businesses.” The
International Journal of Management
Education, November 15, 2018.
https://doi.org/10.1016/j.ijme.2018.11.00
3.

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