By Majd Othman

KUWAIT: Most people are complaining of price increases of consumable products and daily purchases, in addition to services. Meanwhile, financial experts repeatedly explained that "inflation" is the main cause of these price hikes. But many people do not know what this word means, and how it affects prices.

Inflation is the price rise in the cost of products and services during a certain period of time, while the money that you have in your pocket is not enough to make you buy the same number of things that you used to buy before. Some people might think controlling product prices depends on decisions by traders and producers. This is true in some cases, but mostly it is not the main factor, as the market is the main controller, as prices depend on demand and supply.

According to a report by BBC, demand-driven inflation begins with a rise in consumer demand, as traders try to meet demand by increasing supply, but when there are not enough additional goods to increase supply, traders raise their prices, which leads to demand-driven inflation, which is also called "price inflation",

The report also explained the cost of raw materials of consumable products increases due to global issues such as the COVID-19 pandemic and the war in Ukraine, which hinder the supply chain and make it hard on companies to provide produce products and deliver them. Prices will then increase due to the shortage of stocks.

Inflation types

Inflation is divided according to specific categories based on the price ratio and the cost of production due to the situation the country suffers from, while the type of inflation depends if the country is affected by global or local issues, according to the business website Rowwad.

Creeping or aggressive inflation

It occurs when prices rise by 3 percent or less annually, and this type of inflation benefits economic growth, because it makes consumers expect prices will continue to rise, which reinforces current demand.

Accelerated inflation

This type of inflation occurs when prices rise by 3-10 percent per year and is harmful to the economy, because consumers start buying more than they need, which leads to producers not being able to provide the required quantity.

Wild inflation

As prices rise by more than 10 percent per annum, money quickly loses its value, causing instability in the economy.

Hyperinflation

This occurs when prices rise more than 50 percent per month. This is very rare in practice and is usually when governments print money to pay for wars.

Inflationary depression

This type of inflation occurs when economic growth and production are stagnant, accompanied by price inflation.

Common effects of inflation

According to the business platform Arqaam, the first thing affected by inflation is the purchasing power of the currency, which means that people's ability to buy specific items is no longer strong as it used to be due to price rises and fixed incomes.

Encouraging spending and investment

Inflation and decreased purchasing power encourage people to buy goods now rather than later because the currency will lose its value by time. In addition, consumers will fill up their cars with gas, stock up on food and buy shoes for their children in larger sizes to fit them next year. The platform also mentioned companies will invest capital and investors will buy gold and other precious metals. In the long run, stocks have proven to be the best hedge against inflation.

Hyperinflation

Whenever the rate of spending and investment increases due to inflation, the rate of inflation increases and turns into hyperinflation, which enters the economy into a vicious circle.

High cost of borrowing

There is a relationship between inflation and interest rates - when interest rates are low, individuals and companies are encouraged to borrow. When central banks raise interest rates, they make people and companies refrain from borrowing, and some even prefer to put their money in banks to earn interest, while many projects could be affected due to the lack of borrowing that finances project movements.

Decreased job opportunities and growth

The report explained that when inflation rates rise to the point that the economy enters a state of cumulative inflation (fast and wild inflation), there will be an economic recession, which leads to a slowdown in growth and a steady rise in unemployment.