Friday, November 24, 2017
   
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Inflation

What is Inflation?

Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. The rate of inflation is traditionally measured by the percentage change in a selected basket of consumer goods and services.

Types of Inflation

Demand-Pull Inflation

Cost-Push Inflation

Consequences of Inflation

Inflation decreases the real value of money and income. This prompts those affected to want to protect their future investments and returns. Consequently, it is of primary importance to implement economic policy to ensure price stability. As such, the primary purpose of the Bank of Guyana is to formulate and implement monetary policy so as to achieve and maintain price stability.

Some adverse effects of inflation are:

  • The purchasing power of money is affected.
  • Inflation diminishes incentive to save and puts upward strain on the interest rates as savers demand higher compensation to forego consumption today.
  • Uncertainty about future returns on investment increases.

 Calculating the Inflation Rate

In Guyana, the Urban Consumer Price Index (CPI) is used to measure inflation.

The inflation rate is calculated as the percentage change in the cost of the ‘basket of goods and services’ from one period the another.

Inflation Rate=(CPI2-CPI1)/CPI1 x 100

where:

CPI2 = Consumer Price Index of current period

CPI1 = Consumer Price Index of previous period