Inflation Should Be Regarded as The Number One Public Enemy
Inflation is defined as the general price level’s sustained increase over a period of set time. This period is usually observed over 12 months.
For different levels, inflation is calculated differently. You can calculate inflation for states, countries and even a particular demographic. The rate of inflation greatly varies according to the level.
During inflation, the prices of services and commodities rise while your income stays the same. In short, you pay more for availing goods and services.
Reasons why inflation is bad
Inflation slowly erodes the purchasing power. This affects everyone, especially people with fixed incomes (pensioners, for example).
While the value of saving suffers, the power of borrowing increases during inflation. This means paying debts becomes easier as the real value of the borrowed amount declines.
Given this logic, governments benefit the most from inflation. This is because they borrow the most among all industries and sectors. With higher inflation, tax collection also increases. Due to the surplus of tax the total government debt shrinks in comparison to the total government revenue.
Instruments to manage inflation
In most countries, it is the Central Banks responsibility to curb inflation. To do so, Central Banks adjust the rates of interest. Countries with the inflation targeting model tend to use this method the most. For tackling inflation, the interest rates are adjusted according to the inflation rate.
For this to work, the interest rate should be kept above the rate of inflation.