In continuation of the series on Inflation we started yesterday, we are going to consider the Causes of Inflation and how it is Measured in the economy.
Inflation Theories – Causes of Inflation
Two general theories explain inflation.
The first, the demand-pull theory, says that prices increase when demand for goods and services exceeds their supply.
The second, the cost-push theory, says that companies create inflation when they raise their prices to cover higher supply prices and maintain profit margins.
These theories should give you an understanding of what causes Inflation.
However, economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply which leads to more money in circulation pursuing the same quality and quantity of goods and services.
When this happens, it is natural for suppliers to increase the price of their goods, thereby reducing the value of the currency
How is Inflation Measured?
The National Bureau of Statistics is saddled with the responsibility of measuring and announcing the current rate of Inflation every month.
It does this using what is known as the Consumer Price Index.
The CPI measures the average change over time in prices of goods and services consumed by people for day- to-day living.
The construction of the CPI combines economic theory, sampling and other statistical techniques using data from other surveys to produce a weighted measure of average price changes in the Nigerian economy.
The key factor in the construction of the price index is the selection of “the market basket of goods and services”.
Every month, 10,534 informants spread across the country provide price data for the computation of the CPI and the market items currently comprise of 740 goods and services regularly priced. (Vanguard)
Due to the scope of our lesson, I am not going to cover the details of how this is calculated.
Next, we are going to look at the negative and positive effects of Inflation on your Finances.
Do you have any question or suggestions, the comments box is all yours.