TABLE OF CONTENTSINTRODUCTION91.DEFINITION OF INFLATION102.HISTORY OF INFLATION103.MODERN DAY MEANING OF INFLATION104.CONSUMER PRICE INDEX115.INFLATION RATE126.CAUSES OF INFLATION147.EFFECTS OF INFLATION158.CONTROLLING INFLATION15CONCLUSION16REFERENCES20INTRODUCTIONThe purpose of this project is to clearly define INFLATION, identify its causes and effects and the ways of effectively controlling it. This assignment is designed to provide clear understanding of what inflation is. Further the essay will outline the causes and effects of inflation in the economy as a whole and will identify measures on how the government can influence and effective control inflation to the advantage of the state economy.1.DEFINITION OF INFLATIONIn Economics, Inflation is a rise in the general level of prices of goods and services in economy over a period of time. (Michael Burda and Charles Wyplosz(1997), Macroeconomics: A European text, 2nd ed., p. 579 (Glossary)2.HISTORY OF INFLATIONThe origin of Inflation dates back to the time when gold was used as the purchasing medium in trading goods. It is a term which was referred to a condition of currency. It was originally referred to as the devaluation of the currency. The best example to show this devaluation is when a ruler or a king collects gold from his people and subsequently melt these down then mix it with other semi-precious metals such as silver, copper or lead to increase the coins in circulation without the need to increase the amount of gold to produce them. And when the ruler or king adopts this practice, the supply of coins in circulation would increase but will ultimately decrease the value of the coin. Once the value of the coin declines, it would increase the number of coins required to exchange for goods or services. Applying the basic concept of the Law of Supply and Demand in Economics, this would mean that as the value of a coin decreases due to a generous supply in circulation, there is a proportionate increase in the number of coins required in exchange of goods or services And although this will increase the money supply, the value of the coin is decreased. When the relative value of the coin decrease, the consumers would require more coins to purchase and would experience a price increase with the decline of the coins value.3.MODERN DAY MEANING OF INFLATIONFor many years inflation was not related to price but rather a condition of currency as described above. Over the years and with many arguments amongst economists, what was once described as a monetary cause now is being described as a price outcome. (Michael F. Bryan, 1997, On the Origin and Evolution)In the modern day, we hear different types of inflation. It is a word often used synonymously with price increase. In todays economy, Inflation is defined as the sustained rise of the average price level of a country over a period of time. (http:/en.wikibooks.org/wiki/IB_Economics/Macroeconomics)4.CONSUMER PRICE INDEXThe rate of inflation is measured by the annual percentage in the level of prices as measured by the Consumer Price Index (CPI). (Robert Hall and John Taylor (1986), Macroeconomics: Theory, Performance, and Policy, page 5. The Consumer Price Index measures prices of a selection of goods or services purchased by a typical customer. The Consumer Price Index aims to measure how consumers purchasing power is affected by rising prices. (Blanchard et al, 1993, 2000, 2002) It measures the process of a selection of goods and services purchased by a typical consumer. (Mankiw 2002, p.22-32) Household expenditure surveys are performed which seeks to measure what people spend their money on to get a typical basket of goods. This basket of goods is updated each year to take into consideration changes in expenditure. The basket of goods gives relative importance to each different item and changes in the prices of goods or services monthly are monitored and combined into a single figure with using weights in the basket.The below is the typical basket of goods and services for UK consumers:(Consumer Prices Index and Retail Price Index: the 2008 Basket of Goods and Services, National Statistics Office, 2008)5.INFLATION RATEThe Inflation rate is the percentage rate of change of a price index over time. (http:/en.wikipedia.org/wiki/Inflation_rate) It is calculated using the Inflation rate formula:CPI Current - CPI Previous=Current Inflation Rate CPI PreviousCPI April September 2008(First Release: Consumer Prices Indices, September 2008 p.1, National Statistics Office)Applying the formula of calculating the Inflation rate using actual data from the National Statistics Office, the resulting inflation rate over the 3 month period from April to June 2008 is 1% which means that the general l