Inflation

Inflation is a generally defined as a persistent rise in the general price level with no corresponding rise in output, which leads to a corresponding fall in the purchasing power of money. It leads to a redistribution of income and wealth and affects balance of payments. Inflation occurs in many countries but at different rates; it varies considerably in its extent and severity. There are different rates of inflation: from gentle creeping (mild) inflation (perhaps 5% per annum), which may pose few difficulties to business, to galloping or hyper-inflation (say, 100% +), which entails enormously high rates of inflation and create almost insurmountable problems for the government, business, consumers and workers.

Demand-pull inflation occurs when demand for the nation’s goods and services outstrips that nation’s ability to supply these goods and services.

Cost-push inflation. This takes place when firms face increasing costs. This could be caused by an increase in wages owing to trade union militancy, the rising costs of imported raw materials and components or companies pushing up prices in order to improve their profit margins.

A serious problem is that once the rate of inflation has begun to increase, a serious danger of expectational inflation will occur.

The monetarists argue that inflation is caused by increase in the supply of money.

We can establish how much inflation there is in our economy by measuring it. The most common way of doing this is by using the Retail Prices Index (RPI). There are also other indicators of inflation in the economy.

Financial institutions

Financial institutions are financial intermediaries, which connect ultimate borrowers and ultimate lenders. Financial institutions can be classified as either bank financial intermediaries (BFIs) or non-bank financial intermediaries (NBFLs).

Bank financial intermediaries in the UK are commercial or retail banks such as:

• the high street banks (Yorkshire Bank and Abbey National);

• Girobank;

• a number of smaller retail banks;

Non-bank financial intermediaries in the UK include:

• National Savings Bank;

• Finance houses;

• Insurance companies;

• Pension funds;

• Investment trust companies.

Commercial banks are the most important of all the financial institutions. Nowadays commercial banks have become important lenders in the real estate market.

Savings Associations. These associations are incorporated, and their deposits can be insured or uninsured. They are state or federally charted.

Mutual Savings Banks are owned by their depositors, who are shareholders.

Credit Unions first appeared in the United States in 1909. They are organized as cooperatives for members who share a common interest – such as employees of a company, unions, a fraternal order, or a church. Members buy shares that make them eligible to borrow from the credit union.

Money Market Mutual Funds sprang up in the mid-1970s. People buy shares in a fund and have limited checking privileges on these shares.

Insurance Companies include life insurance and property and casualty insurance companies. Life insurance companies receive funds (premiums) that insure people against the financial consequences of death. Actuarial tables permit them to predict with great accuracy the annual number of deaths (and therefore the amount of money they must pay to policy beneficiaries) for long periods of time. Property and casualty insurance companies insure car owners against theft and collision and homeowners against fire and burglary.

Pension and Retirement Funds are akin to life insurance companies; they can predict with high accuracy what their annual payouts (pension annuities) will be for long periods in the future.