Inflation is a sustained rise in the general level of prices for goods and services. It is measured as an annual percentage increase.
As inflation rises, every dollar you own buys a smaller percentage of a good or service. In other words, inflation reflects a decrease in the purchasing power of each individual unit of currency.
When the rate of inflation is high, it suggests that customers should buy now before prices go up even further, while sellers may want to delay offering their goods until they can charge more.
High levels of inflation can include rapid increases in the price of everyday items such as food and fuel, or major items like houses and cars.
In general, when inflation is too high it can lead to economic instability because people are unable to plan their spending and saving.
What Causes Inflation?
Inflation is caused by an increase in the money supply, changes in government policy, cost-push factors such as rising wages and increasing prices of raw materials, or a combination of all these factors.
An increase in the money supply can lead to higher levels of inflation if people are using more money to purchase goods and services than what is available. This can cause demand for certain goods and services to outpace supply, leading to an overall increase in prices.
Governments may also directly influence the level of inflation through their policies. For example, if governments attempt to stimulate economic growth by printing large amounts of money or cutting taxes, this can lead to high levels of inflation as people have more cash to spend but not necessarily more goods or services to purchase.
Lastly, cost-push factors such as rising wages and increases in the price of raw materials can lead to inflation as businesses may choose to pass on these higher costs by charging customers more for their products and services.
It is important to keep a close eye on inflation, as it can have a significant impact on the economy.
Governments, businesses, and individuals should all be aware of how changes in prices might affect their buying power over time.
By understanding what causes inflation, we can better prepare ourselves for any economic shifts that may come our way.