Inflation!
What is inflation?Inflation is a sustained increase in the average price of all goods and services produced in an economy. The rate of inflation is measured by the annual percentage change in consumer prices.- The Real Rate of Interest that compensates lenders for postponing their own spending during the term of the loan.
- An Inflation Premium to offset the possibility that inflation may erode the value of the money during the term of the loan. A unit of money (dollar, peso, etc) will purchase progressively fewer goods and services during a period of inflation, so the lender must increase the interest rate to compensate for that loss..
- Various Risk Premiums to compensate the lender for risky loans such as those that are unsecured, made to borrowers with questionable credit ratings, or illiquid loans that the lender may not be able to readily resell.
• Inflation can come from both the demand and the supply-side and also from internal and external economic events.
• Some inflationary pressures direct from the domestic economy, for example the decisions of the utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets. A rise in the rate of VAT would also be a cause of increased inflation in the short term because it increases a firm’s production costs.
• Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.
• Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index.
• Some inflationary pressures direct from the domestic economy, for example the decisions of the utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets. A rise in the rate of VAT would also be a cause of increased inflation in the short term because it increases a firm’s production costs.
• Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.
• Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index.
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