Essay: What is Inflation

Sample Essay

Economically we can define inflation as the rate at which the general price levels of goods and services within an economy rises, while at the same time the purchasing power of the currency falls. This means that if a unit of one currency can by a certain basket of goods, as the prices of goods goes up the same unit of the currency will buy less of the basket of goods. In most cases central banks try to maintain an inflation of not more than 3%.

Inflation is not necessarily a harsh and arbitrary form of taxation although if not maintained it can be. Inflation can be a harsh and arbitrary form of taxation if as the rate of inflation rises the general wage rate is kept constant or even unfortunately goes down. Under such circumstances consumers of goods as well as the entire labor force will bear the increased cost of products as if it was an additional tax on the goods consumed.

On the other hand if the wage rate rises at a rate higher than the rate of inflation then we cannot consider the inflation rate to be some form of tax, but instead we could even consider it to be some form of consumption incentive.

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