Inflation, refers to the phenomenon that under the condition of currency circulation, because the money supply is greater than the actual demand of money, so the actual purchasing power is greater than the output supply, resulting in currency depreciation, and the price continues to rise and rises in a period of time. . Its essence is that the total social demand is greater than the total social supply.
When the prices of most commodities and services in an economy continue to rise in different forms (including dominant and implicit) over time, macroeconomics says the economy is experiencing inflation. According to this statement, if the price of only one commodity rises, this is not inflation. Only the price of most commodities and the price of labor continue to rise, that is inflation. The economics community’s interpretation of inflation is not completely consistent. Usually, the concept recognized by economists is that under the credit currency system, the amount of money in circulation exceeds the actual needs of the economy, and the currency depreciation and price level are comprehensive and sustained. In layman’s terms, the circulation of banknotes exceeds the amount required in circulation, which causes the depreciation of banknotes and the rising in prices. We call this phenomenon is inflation.
The rise of prices in the definition does not mean that the price of one or several commodities rises, nor does it rise at a temporary level. Generally speaking, the price level continues to rise generally during a certain period of time, or the process of continuing decline for a certain period of time.
It can be seen that inflation does not mean the price increase of one or the other kind of goods and services, but the rise of the total price level.
The total price level or the general price level refers to the weighted average of the total price of all goods and services transactions. This weighted average is the price index.
There are generally three price indices for measuring inflation: the consumer price index, the producer price index, and the GNP price conversion index. Simply put, when the government issues too much money, prices will be raised.
The impact of inflation on household income and household consumption:
(1) The actual income level drops
(2) The income effect and substitution effect of rising prices lead to a decrease in welfare.