Introduction;

Inflation  is a measure that measures the change in price level. It increases when there are changes in the cost of living or when prices increase due to some other factor like war or recession.

Factors:

Inflation rates can be affected by many factors. For example, government policy making, business activity, and economic growth. These three factors play an important role in determining the inflation rate of a country.

Inflation rate in China is 1%, which means it is not very high. By Chinese standards it is still a good monetary condition because of its size and relatively low interest rates. From time to time it has been increasing as China focuses more on domestic industry development instead of export.

Source of Inflation:

The major source of  inflation rate in China is the consumer price index (CPI). CPI is generated by using all the data of households. Since 2005, CPI has increased from 3.3% in 2006 to 10.6% in 2013. In 2014, CPI was around 12%. The annual average income increased from $5,800 to $14,000 in 2015. Consumer price index is one of the major items in Chinese economy.

What is GDP?

In the first half of 2016, China’s GDP grew by 4.1%. This means the GDP increased by more than 2%. GDP is also known as GPD. People’s Purchasing Price Index (PPI) is another official item in China. A PPI includes a wide variety of goods, services, and capital goods. According to the World Bank, China accounts for only 20% of world exports.

Inflation rate is determined by different factors. These factors include government policymaking, industry activity, and economic growth. When there is an increase in these three factors, it causes an increase in the inflation rate in China.

Economy:

Inflation rate is one of the most important indicators about China’s macroeconomic conditions. One way to understand what is inflation rate in China it is determined by the amount of money supplied by the central bank and accumulated interests in a particular entity. When the economy is stable, the supply of money is kept the same and more money will accumulate. If the economic situation is bad, then this monetary base would decrease and the total amount of money to be held will decrease. As a result, the currency will become weaker and weaker. In the worst case scenario, then this monetary base could lead to a depression.

Effects:

Inflation rate has significant effects on an economy because it affects the purchasing power. An increase in an inflation rate will discourage people from buying new products or increasing the amount of consumption. So, if we expect to see a drop in sales, it can cause a decline in the overall national economy. In addition, some people in China consider inflation rate as “risk”. That could mean the value of the currency has fallen. On the contrary, the higher the inflation rate, the lower the risk to buy foreign currencies. Finally, inflation rate creates uncertainty in the market because everyone wants to hold a bigger amount of cash.

Inflation rate is used to describe the general monetary stability of a particular economy. Its existence cannot tell us much about how the government can control the economy. Another thing that should be mentioned is inflation rate impacts an economy in many ways. Here are some examples:

Examples:

When the inflation rate rises, wages are cut. This makes workers to be less competitive. They will have fewer options about choosing what to buy and what to pay for. At the end of the day, they have no choice but to accept the higher wage rate which leads to job losses. Also, in some places, salaries are lowered. This makes employers to hire unskilled workers but don’t want to pay them too big salaries. Thus, they need to bring in more employees. To avoid the loss of jobs the economy needs to raise wages a bit. Because with higher wage, there will be less job vacancies for workers.

In addition, more and more companies may close down their offices because their profits are not enough for survival. Workers will lose their jobs and the economy won’t get any new ones in the future.

When the inflation rate reaches the point where companies don’t feel confident about remaining viable, then business operation stops and employees might lose their jobs.

When the number of unemployed people grows, unemployment rate grows. This makes it hard for someone to find work. And if you don’t want to spend your money, you may find yourself out of work. Furthermore, high unemployment rate causes poverty. Some people live in poor conditions and can’t earn an income. High number of unemployed people leads to poverty.

Inflation rate in other countries:

Inflation rate in America and United Kingdom is 5%, which means it is quite strong. However, the United States budget deficit isn’t at that level. So the government has to cut its spending by cutting tax rates, decreasing state and local government spending, and reducing government programs. In addition, the US dollar is weak compared to British Pound so the exchange rate becomes weaker.

According to Investopedia in United Kingdom, it has the highest inflation rate at 1.4%.