What Is Inflation?

What Is Inflation?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Inflation is a term used to describe a general increase in prices and fall in the purchasing value of money. If the inflation rate is high, it means the prices of goods and services are increasing rapidly, putting pressure on the cost of living. If inflation is low, prices are not increasing as quickly. Central banks strive to manage inflation, understanding that both high and low inflation can have adverse effects on an economy.

Related Questions

1. What are the causes of inflation?

Inflation is predominantly caused by two factors – demand-pull and cost-push. Demand-pull occurs when demand for goods and services exceeds their supply. On the other hand, cost-push inflation happens when the costs of production for items increase, leading producers to hike prices to cover their expenses.

2. How is inflation measured?

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Inflation is generally measured by the Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI compares the current and base year costs of a basket of goods and services consumed by households. The PPI measures the average change in selling prices from the perspective of producers.

3. What are the effects of inflation on the economy?

Inflation influences the economy in various ways. If controlled, it can help stimulate consumption and investment. However, if inflation rates are high, it may erode the purchasing power of money, increase costs, and create uncertainty in the market, adversely affecting economic growth.

4. Can inflation be beneficial?

Yes, a moderate level of inflation is considered beneficial for an economy as it indicates that the economy is growing. It can encourage spending and investment, which stimulates economic activity and creates jobs.

5. What is hyperinflation?

Hyperinflation is an extremely high and typically accelerating inflation. It devalues the local currency and creates chaos in the economy. It erodes savings and makes the normal functioning of the economy impossible, leading to the downfall of the economic structure.