Inflation can be defined as a state in which there is are excess units of currency in relation to physical volume of trade and business. According to the definition it can be inferred that an increase in supply of currency/money is the cause, which tells us that the central bank of a nation is printing more money as a result of government spending. Thus, inflation is a monetary phenomena. In the real world inflation would mean that a unit of currency would by you less goods in the current year comparative to the year before. Inflation is calculated using CPI (Consumer Price Index). It is important that governments ensure CPI's reflects actual market behavior thus giving accurate inflation percentage.
Let me now give you the cause of inflation in a nation, a decrease in supply of goods when there is an increase in demand of the same good. A decrease in supply is mainly caused by industrial disputes, shortages of factors of production, natural calamities as well as hoarding of goods by the supplier. On the other hand an increase in demand is mainly caused by increase in government expenditure, increase in private expenditure, increase in consumer spending as a results of modern-day credit purchases, reduction in taxes, governments repaying their debts, increase in population, as well as deficit financing.
However, economist suggest that inflation is a good thing and key in the modern day economy. So is inflation good? Better put, moderate inflation is a good sign in an economy. As in any good economy employment is high that means higher wages.Now with higher wages, the people have more purchasing power, therefore demand for goods as a whole would increase. Moving on, higher demand would mean greater utilization of resources, which in the end brings in profit for the producer. Greater utilization would increase supply as a whole too. The basic supply graph tells us that supply increases when price increases thus the price of goods would rise slightly causing a small reduction in demand.
