Inflation means increased prices, which can also be defined as decreased purchasing power over time. The downturn of purchasing power can be reflected in the average price increase of a basket of specific goods and services in a certain period. A price rise often expressed as a percentage, means that a currency unit can effectively buy less than in previous periods. For example, Ahmad used to buy 200 grams of meat with 100 Afghanis a year ago, but today he can buy 180 grams of beef with the same 100 Afghanis. The absence of inflation can be felt when prices decrease and purchasing power increases.

Basic Concepts of Inflation

In an inflationary economy, the price of goods and services will increase. Inflation is sometimes classified into three types:

• Demand-pull inflation (increasing demand and decreasing supply)
• Cost-push inflation (growing prices of raw materials and products and dwindling supply)
• Built-in inflation (increasing the cost of living and then raising wages)

The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are the most popular indexes for detecting and measuring inflation.

While it is easy to measure the price changes of a single type of product over a specific time, human needs go beyond one or two products. To have a comfortable life, people need a large set of diverse products and services, which include goods such as food, grains, metals, and fuel, amenities such as electricity and transportation, and services such as health care, entertainment, and labor.

Inflation aims to measure the overall effect of price changes on a diverse set of products and services. Thus, inflation allows us to understand the increase in the price level of goods and services in an economy at a particular period. Knowing the inflation rate, you can understand how much more expensive goods or services have become.

In an inflationary environment, prices rise, meaning a currency purchases fewer goods and services. This loss of purchasing power affects the living cost for the public, which finally leads to lower economic growth. The popular view among economists is that sustainable inflation occurs when the development of a country's money supply outstrips that country's economic growth.

An increase in the money supply is the root of inflation; although inflation can occur in the economy in many ways, a country's money supply can be increased by the monetary authorities by doing the following:

·         Print and donate more money to citizens

·         Legal devaluation of domestic currency

·         Granting new loans as a credit to the reserve account through the banking system, by buying government bonds from banks in the secondary market, which is the most common method.

Advantages and Disadvantages of Inflation

Inflation can be calculated as positive or negative depending on personal perspective and the number of its changes.

People who own tangible assets such as real estate or stocked commodities may be interested in seeing a little inflation, as it increases the cash value of their assets and causes the investor to sell the asset at a price higher than its purchase price.

Also, a desirable inflation rate encourages people to spend money. Because by holding cash, its value and purchasing power decrease.

If inflation takes an optimal rate, it brings the mentioned benefits. But otherwise, inflation causes severe damage to a country's economy, which can be summarized as follows:

·         As the value of money decreases, its purchasing power decreases, and buyers have to pay more for various products and services than before.

·         As the inflation rate increases, higher prices are imposed on the economy.

·         Inflation raises some prices first and others later over time.

What Causes Inflation?

The three leading causes of inflation are demand-pull inflation, cost-push inflation, and built-in inflation.

Demand-pull inflation is when not enough products or services are produced to keep up with demand, causing their prices to rise.

On the other hand, cost-push inflation occurs when the cost of producing products and services increases and businesses have to raise their prices.

Built-in inflation, sometimes called the wage-price spiral, occurs when workers demand higher wages to keep up with rising living costs. This, in turn, causes businesses to raise their prices to cover the cost of raising wages, which creates a self-reinforcing cycle of wage and price increases.

 Is Inflation Good or Bad?

In general, higher inflation harms savers because it erodes the purchasing power of the money they have saved, which simultaneously can benefit borrowers.

Too much inflation is considered harmful to an economy. At the same time, meager inflation is also regarded as dangerous. For this reason, many economists support a moderate inflation rate (around 2-3% per year).