Inflation is an increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices. It may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.
Inflation and Money Supply
Inflation or rise in the prices of goods has a bearing on the money supply and monetary policies of National Governments. It has been quoted that "Inflation is too many dollars chasing too few goods."
If a government prints huge amount of money, whereby the supply of currency in the market increases and there are few goods available in the market, it would lead to inflation. In other words inflation is caused by four factors:
- The supply of money goes up.
- The supply of other goods goes down.
- Demand for money goes down.
- Demand for other goods goes up.
Measures of Inflation
Inflation can be measured in the following ways:
- Raw Materials Price Index (RPI) or the "crude goods" price index, which calculates commodity price inflation.
- Industrial Product Price Index (IPPI) which measures changes in the wholesale price of goods.
- The Consumer Price Index (CPI) which measures the change in retail prices.
Deflation
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Deflation can occur due to the following reasons.
- The supply of money goes down.
- The supply of other goods goes up.
- Demand for money goes up.
- Demand for other goods goes down.
Inflationary and Deflationary Trends in Singapore
|
Year
|
Annual Inflation Rate (in %)
|
|
1961
|
0.3
|
|
1962
|
0.5
|
|
1963
|
2.2
|
|
1964
|
1.6
|
|
1965
|
0.3
|
|
1966
|
2.0
|
|
1967
|
3.3
|
|
1968
|
0.7
|
|
1969
|
-0.3
|
|
1970
|
0.4
|
|
1971
|
1.8
|
|
1972
|
2.2
|
|
1973
|
19.6
|
|
1974
|
22.3
|
|
1975
|
2.6
|
|
1976
|
-1.9
|
|
1977
|
3.2
|
|
1978
|
4.8
|
|
1979
|
4.0
|
|
1980
|
8.5
|
|
1981
|
8.2
|
|
1982
|
3.9
|
|
1983
|
1.2
|
|
1984
|
2.6
|
|
1985
|
0.5
|
|
1986
|
-1.4
|
|
1987
|
0.5
|
|
1988
|
1.5
|
|
1989
|
2.4
|
|
1990
|
3.4
|
|
1991
|
3.4
|
|
1992
|
2.3
|
|
1993
|
2.3
|
|
1994
|
3.1
|
|
1995
|
1.7
|
|
1996
|
1.4
|
|
1997
|
2.0
|
|
1998
|
-0.3
|
|
1999
|
0.0
|
|
2000
|
1.3
|
|
2001
|
1.0
|
|
2002
|
-0.4
|
|
2003
|
0.5
|
|
2004
|
1.7
|
|
2005
|
0.5
|
|
2006
|
1.0
|
|
2007
|
2.1
|
|
2008
|
6.5
|
