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Inflation is defined as a sustained increase in the general level of prices for goods and services. It is
measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller
percentage of a good or service.

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.
Hyperinflation is when the prices of goods and services rise more than 50% per month.1 At that rate, a loaf of bread
could cost one amount in the morning and a higher one in the afternoon

The most common and most well-known measure of inflation is the change in the consumer price index - the CPI. The
CPI contains components that reflect what the average family purchases to obtain a minimum standard of
living in the economy. Comparing the monthly or yearly numbers from these indices offers one measure of
inflation.
The types of inflation are defined in terms of its causes. The causes are:

1. Demand –pull inflation is caused by an increase in demand in the economy. Total demand in the
economy by all groups – households, firms, government and the export sector – is termed as aggregate demand.
When aggregate demand increases and supply of goods in the economy cannot be increased to meet this increase, the
result is rising prices.

 2. Cost-push inflation is caused by an increase in the prices of the factors of production. This causes firms’
costs to rise. If payments to any of the factors of production increase, this will cause costs to increase. Firms will, in
most instances increase prices in order to maintain profit levels. A main form of cost-push inflation is the increase in
wages. Cost push inflation can also be seeing as imported inflation.

There are several reasons why firms may experience increase in cost of production
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 Rising wages

If trades unions can present a common front then they can bargain for higher wages. Rising
wages are a key cause of cost push inflation because wages are the most significant cost for
many firms. As wages increase cost these cost are pass on to consumer in what is known a wage
price spiral. (higher wages may also contribute to rising demand)

 Import prices

Increase in world prices of imported goods will lead to more expenses goods locally. If there is a
devaluation/depreciation then import prices will become more expensive leading to an increase in
inflation. A devaluation / depreciation means the domestic currency is worth less, therefore we
have to pay more to buy the same imported goods.

 Raw material prices

The best example is the price of oil, if the oil price increase by 20% then this will have a significant
impact on most goods in the economy and this will lead to cost push inflation. E.g. in early 2008,
there was a spike in the price of oil to over $150 causing a temporary rise in inflation.

 Profit push inflation

When firms push up prices to get higher rates of profits . This is more likely to occur during strong
economic growth.

 Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

 Higher taxes

If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and
therefore CPI will increase.
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3. INCREASE IN MONEY SUPPLY/ Money supply and Liquidity Inflation is an increase in money supply in the
economy. An increase in money supply causes an increase in aggregate demand and output
remains constant causing an increase in prices. Some economist called monetarist fell that the one true cause
of inflation is an increase in money supply.

Who Benefits From Inflation?

• While consumers experience little benefit from inflation, investors can enjoy a boost if they hold assets in
markets affected by inflation. For example, those who are invested in energy companies might see a rise in
their stock prices if energy prices are rising.
• Some companies reap the rewards of inflation if they can charge more for their products as a result of a surge
in demand for their goods. If the economy is performing well and housing demand is high, home-building
companies can charge higher prices for selling homes

CONSEQUENCES OF INFLATION

 A fall real income especially for fixed income earners such as pensioners
 Price exports will rise making them less competitive internationally so less will exported.
Less foreign exchange will be earned and if imports remain the same then trade deficit will
occur
 Borrowers gain as they actually pay back less to the lender due to inflation as the money
they pay back is now worth less than when they borrowed the money. Therefore creditors
lose out.
 Rising cost may force some producers out of the market if the cost cannot be passed on to
the consumer. It may result in unemployment as producer decrease labour as labour cost
increase
 Inflation may actually increase employment if rising prices attract new producers who will
increase production. This is especially true if the cause of inflation is demand pull.
 Creditors lose out because the sum to be repaid in real terms falls less.
 Fall in the value of savings

REMEDIES TO CONTROL INFLATION

1. Fiscal policy to control demand may include decrease in government spending and
increase in taxes. This will dampen consumer spending and thus demand in the economy.-
DEFLATIONARY
2. Likewise monetary policy will focus on increasing the interest rate and decreasing money
supply to remedy demand pull inflation -DEFLATIONARY
3. Decrease in indirect taxes will assist with controlling cost push inflation
4. Wage control will stop the effects of wage price spiral inflation
5. Price ceilings will prevent prices on certain products from increasing
6. Hire purchase restrictions: raising minimum deposit and reduce time allowed for payment.

INFLATION IN JAMAICA

Jamaica inflation rate for 2019 was 3.91%, a 0.17% increase from 2018. Jamaica inflation rate for 2018 was
3.74%, a 0.64% decline from 2017. Jamaica inflation rate for 2017 was 4.38%, a 2.02% increase from
2016. Jamaica inflation rate for 2016 was 2.35%, a 1.32% decline from 2015.

DEFLATION

When the overall price level decreases so that inflation rate becomes negative, it is called
deflation. It is the opposite of the often-encountered inflation.
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• It is a negative inflation rate.

• Deflation means the value of money will increase.

This deflation was caused by:

• High real interest rates depressing demand

• DECREASE IN DEMAND

Deflation is considered harmful to economy because:

• People delay spending; hoping prices will be lower next year; this causes further falls in
aggregate demand and rate of economic growth.

• Workers resist nominal wage cuts. Therefore, real wages rise causing real wage
unemployment.

• Real interest rates become too high. Even interest rates of 0% cannot induce people to
spend creating a liquidity trap.

• Deflation increases the burden of debt and reduces the disposable income of indebted
people.

• Deflation can become entrenched in the economy – causing sluggish rates of economic
growth.

Demand –pull inflation Cost-push inflation Money supply and Liquidity

Inflation
Fiscal policies where Regulations to limit the power Monetary policies will be
government expenditure is of trade unions to increase effective because higher
reduced and taxes are wages will be effective in interest rates will reduce
increased to reduce total curbing cost-push inflation. money supply.
spending in the economy.
Subsidies and grants to firms
can help to increase
Monetary policies will also be Reduce money supply and
production and make more
effective as higher interest limits on borrowing will
goods and services available.
rates will limit borrowing and reduce spending and take
This will put less pressure on
spending. This will reduce away pressure on prices
prices and increase supply.
inflation as there is less
spending and less pressure on
prices to increase.
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