In economics, inflation is the rate at which the general prices for goods and services rise, and the purchasing power of currency decreases. In other words, it is the sustained rise in the general level of prices where one unit of currency buys less than it did previously. Inflation can be viewed positively or negatively depending on your viewpoint and the rate of change.
Types of Inflation Indexes
There are three inflation indexes: the consumer price index (CPI), the wholesale price index (WPI), and the Producer Price Index (PPI). The CPI is a measure that examines the weighted average of prices of a back of goods and services which are of primary consumer needs such as transportation, food, and medical care. The WPI measures and tracks the changes in the price of goods in the stages before the retail level the producer or wholesale level). The PPI is a family of indexes that measures price changes from the perspectives of the seller, unlike CPI which measures price changes from the perspective of the buyer.
Causes of Inflation
Inflation is classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation occurs when the demand for goods and services increases quicker than the economy’s production capacity. The price of goods and services increases when there is higher demand and lower supply. Cost-push inflation occurs as a result of the increase in the cost of production. For example, if the raw materials used to create a good increase in price, the price for the final good is higher. The same happens if the cost of labor to produce the good increases. Lastly, built-in inflation occurs due to adaptive expectations. As the prices of goods and services rise, labor expects to be paid more to maintain their cost of living. As a result of the rise in labor costs, prices for the goods or services that labor produces or provides also increases. This creates a cycle of price increases.
With an inflation rate of 9,986%, Venezuela has the highest inflation rate in the world. This is lower than Venezuela’s previous inflation rate of 14,291%. Potential causes of Venezuela’s hyperinflation include heavy money printing and deficit spending. Venezuela’s economy was once the envy of South America, blessed with large per-capita wealth due to having the largest oil reserves in the world. Zimbabwe has the second-highest inflation rate in the world, but it is only a fraction of Venezuela’s. Zimbabwe’s inflation rate is 676%, up from its previous rate of 540%. Zimbabwe’s hyperinflation is because of the high national debt, a decline in economic output, a decline in export earnings, and price controls that exacerbate shortages.
Sudan has an inflation rate of 71.40%, the third-highest in the world yet significantly smaller than both Venezuela and Zimbabwe. Inflation in Sudan has increased drastically in recent years, driven by food, beverages, and a black market for U.S. dollars. The rising inflation became so bad that it sparked protests and ultimately the ousting of President Omar al-Bashir in April 2019. Sudan’s transitional authorities are now tasked with turning around an economy plagued by three years of mismanagement. Argentina’s inflation rate is currently 46.90%, lower than its previous value of 50.30%. In 2019, Argentina’s inflation rate hit almost 54%, the highest in 28 years, and the same year that Argentina awe growing poverty, high unemployment, and sharp devaluations of the Argentine peso. Argentina’s inflation rate is expected to continue to fall to 42.2% in 2020. South Sudan’s inflation rate is the fifth-highest in the world at 36.4%. In November 2018, South Sudan’s inflation rate was 49%. By April 2019, inflation slowed to 40% thanks to an increase in oil output. South Sudan is an oil-dependent nation, with oil making up around 60% of the country’s GDP and accounting for just about all of its exports.
Countries with the Lowest Inflation Rates
The countries with the lowest inflation rates in the world have negative inflation rates. When the inflation rate falls below 0%, deflation occurs. Sudden deflation increases the value, allowing more goods and services to be bought with the same amount of currency. Deflation can occur from the same causes as inflation, but the opposite. Deflation can occur if the supply of goods is higher than the demand for those goods, causing the price to decrease. Deflation can also occur because of buying power growing due to a reduction in the money supply and/or a decrease in the supply of credit. The following countries are currently experiencing deflation: Eritrea, Fiji, Mali, Qatar, United Arab Emirates, Thailand, El Salvador, New Caledonia, Switzerland, Togo, Oman, Malaysi, Liechtenstein, Armenia, and Taiwan.