What is inflation and its impact ?

The concept of inflation refers to the state of the economy, under the effect of high prices of products and services with a decline in the purchasing power linked to the exchange rate in the country.

It also affects the industrial and service sectors and also indicates the increase in the size of the currency in the market.

this leads to a decline in the real value of currencies.

Offset to the decline in currency is rising in the price of products and services in commercial markets.

Inflation types:

There are many types of inflation we will talk about the 3 most important types:

  • Inflation (normal):
    This inflation is caused by an increase in the number of seams and lead to an increase in their consumption needs. Moreover, forces the government to increase the amount of currencies and this leads to higher prices of consumer products.
  • Inflation on demand:
    Inflation leads to the rise in prices because of the excessive demand for products and services, whether domestic or imported products from other countries. This inflation can be temporary or for a long period of time.
  • Excessive inflation:
    This inflation occurs when the current economy moves to a new economy. This is often the result of wars and the most negative on societies.

Causes of inflation:

  • Increased demand: The amount of money increases with the a limit of availability of products and services.
  • High cost prices: lead to increased prices of products and services in order to achieve the profits required companies resulting in an increase in the cost of production and high wages of employment.

How to face inflation:

When the rate increases, more than the required level, this is positive inflation. Central banks goes into a deflationary monetary policy and aim to reduce the amount of the offered money.

This happens by increasing interest rates until inflation is controlled.
However, when the inflation decreases to a very low level.

This means that the inflation rate reaches zero, which means that the economy has actually entered a period of stagnation and contraction.

This leads to the loss of companies, the low level of profits, bankruptcy and rises to unemployment rates due to the layoffs of workers and employees.

Banks tend to pursue expansionary monetary policy through lower interest rates, which supports the recovery of the economy and its return to the new growth stage. When interest rates fall, this devalues ​​the currency.

Impact of such news on markets:
The effect of the news is very strong at the time of its issuance and this affects the currency directly.

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Hassan Hadaoui
Hassan Hadaoui
Writer and Economist
BC XTB

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