Inflation is best understood in terms of its effect –i.e. a sustained rise in consumer prices or the decreasing purchasing power of our money. A moderate level of inflation is considered positive –what we don’t want is hyperinflation nor do we necessarily want large scale deflation, which can have all sorts of negative consequences for economies.
There are varying economic opinions as to the underlying causes of inflation. In general,I find the monetarist theory or quantity theory of inflation to carry the most merit.But no one theory always perfectly captures 21st Century economic complexity and in many respects the theory is often considered too simplistic.This then leads to other views such as “demand pull inflation”, “cost push inflation”and “supply shock inflation” etc.
Because there has been so much publicity around the extent of the fiscal and monetary response to the coronavirus pandemic, what continues to surprise many investors is that there have actually been remarkably few areas around the world where inflation is out of control.
If we consider the monetarist view, where economist, Milton Friedman famously said “Inflation is always and everywhere a monetary phenomenon”, why then are we not experiencing global hyperinflation?
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