ARTICLE ANALYSIS

Article Analysis

Article Analysis

Article 1

Inflation: What Is It And Why Does It Happen? By David Berky

Analysis

David Berky in this article has analyzed different aspects of inflation. In the 1970 prices of most things Americans buy more than doubled. This general rise in prices is called inflation. Of course, the prices of selected goods may increase for reasons unrelated to inflation: the price of lettuce may increase due to unusually heavy rains in California has ruined the harvest of lettuce, or the price of petrol could rise if oil producing countries set a higher price for oil. During inflation, however, prices tend to rise (Berry, 1994, 36).

During the past 400 years there have been many periods of inflation. In the 16th century when the Spanish began to bring back gold and silver from the New World, Western Europe prices moved upward as the supply of money increased. During the 19th century, prices tend to go down as food and raw materials became cheaper. After major wars, such as the Napoleonic Wars and World Wars I and II, the prices move up again. In the 1950's and 60 so-called creeping inflation occurred when the general level of prices in the United States and Western Europe increased by an average of 1 to 5 percent each year. In the 1970 inflation increased, reaching as much as 13 percent annually in the United States (Himmelfarb, 1984, 74).

Many countries have experienced higher inflation than the United States. Israel had inflation of over 100 percent per year in the decade of 1980, which means that the cost of living more than doubled each year. In Argentina inflation was higher than 400 percent in 1975 and an average of more than 100 percent each year from 1976 to 1982. The most significant inflation in modern times was the German hyperinflation of 1923, when people went to the store with wheelbarrows full of money to buy some groceries. A similar hyperinflation occurred in Hungary after the Second World War.

Inflation has been defined as "too much money chasing too few goods." As prices rise, wages and salaries are also rising. More money in the pockets of people make up prices even higher for consumers who never quite catch up. Inflation may run continuously year after year as long as the money supply is growing.

Continued inflation affects people in different ways. Those living on fixed incomes, or those whose incomes raise very slowly, the most affected by inflation because they are able to buy less and less. Those who lend money when prices are lower can be paid in dollars of reduced purchasing power. Banks and savings and loan associations usually lose from inflation. People, who borrow, however, may benefit by paying their debts in dollars that have been reduced purchasing power. Inflation encourages borrowing and therefore discourages saving. It also leads people to buy real estate and durable goods hold their value over time. In the United States this trend is reinforced by the tax system, which allows taxpayers to ...