Inflation inflation of a country, the Consumer Price

Inflation is an indicator of the economic wealth of a country. The
inflation rate is used to measure the rate of change in the overall price level of goods and services that
we consume. To calculate inflation of a country, the Consumer Price Index (CPI)
is used in most of the countries. CPI measures inflation by calculating the
price change in consumer goods and services from the perspective of consumers.

According to the article published by The Star on 20th
December 2017, titled “Higher food, Fuel costs push up November inflation”, the
inflation rate or CPI for November 2017 rose 3.4% from a year ago. The
Statistics Department said that based on seasonally adjusted term, the overall
CPI for November increased 0.7% as compared to October. Core inflation rose
2.2% in November versus a year ago. In this news article, the inflation is
caused due to higher transport and food costs, which is also called as
cost-push inflation.

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The cost-push inflation happens when the demand for goods
increases due to the prices increase where fewer goods can be produced to
protect profit margins. There are many reasons why costs might rise. Firstly,
the increasing prices of raw materials and other components such as fuel, oil
and agricultural products. Secondly, the higher labour costs because the people
expect higher inflation, so the workers ask for more wages to protect their
real incomes. Besides, the expectation of inflation is also a reason of
inflation. The people always concern about the effects of inflation on their
real standard of living when the cost of goods and services rises. Moreover, an
increase of taxes on alcohol, fuels and cigarettes. The suppliers may pass on
the burden of tax onto customers which depending on the price elasticity of
demand and supply of products. Lastly, a fall in exchange rate will lead to a
higher price of imported goods.

 

 

 

 

 

 

 

 

             

Besides the cost-push inflation, demand-pull
inflation is also another type of inflation. It occurs when the economy demands
more goods and services that are
available. When there is excess demand, producers can raise their prices and
achieve bigger profit margins. There are several causes of demand-pull
inflation. Firstly, a depreciation of exchange rate will increase the price of
import goods but reduce the foreign price of exports good. If the consumers buy
less import goods, the aggregate demand curve in Malaysia will rise while
exports grow. Besides, if direct taxes are reduced, consumers have more
disposable income causing level of demand increases, and the higher government
spending also will cause higher demand. Moreover, the lower interest rates will
increase higher demand for loans. The inflation will increase if there is too
much money chasing too few goods.

 

 

 

 

 

 

 

 

 

In conclusion, if the inflation is too high, it is not good for
the economy and individuals because inflation always reduces the value of money. Therefore, we have to solve the
inflation problem. Firstly, the monetary policy can be used to reduce inflation
by increasing interest rate which helps to
reduce the growth of aggregate demand. The lower aggregate demand will
decrease the inflation in the economy. Secondly,
the fiscal policy also can be used to solve inflation. The government should
increase tax and reduce the government spending which can decrease the growth
of aggregate demand.