Quantitative easing and inflation
Quantitative easing is the creation of new money by the central bank, distributed through bonds and assets to ease restrictions on the monetary supply. However if it ‘prints’ more than the country needs it will lead to inflation. Inflation affects everything regarding money; in a nutshell inflation results in prices going up for goods and services, interest rates and so on.
The main issue that is raised when the option of quantitative easing is put on the table is hyperinflation. This basically means inflation happening on a higher scale, i.e. whilst the prices of goods and services ‘creeping’ up is a pain in the wallet, if it jumped up in the matter of days/weeks you wouldn’t have a wallet.
Inflation leads to higher prices and lower purchasing power, i.e. let’s say your shopping cost you £50 today, a year later after a 5% inflation that same shopping will cost you £52.50. When more pounds are issued for a limited amount of assets the value of each pound is decreased. A pound went further ten years ago than it does today, ah the good old’ days!
Although we good people that populate the country would love little to no inflation it would cause government debt (or make it worse rather). Too much inflation (over 3-5%) will cause ‘super-saving’ were we all decide we only need the basics and our money is safer under the mattress. As it stands inflation rates are at 1.47% as of 16th April 2013.
Quantitative easing and inflation seem to go hand in hand. Due to inflation we all begin saving so no money circulates the economy – the governments answer is quantitative easing. Due to quantitative easing everyone comes out of hiding and spends like no tomorrow – inflation rates rise – and we crawl back into hiding; a viscous circle.
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