What is inflation?

Inflation refers to a sustained and general increase in the price level of goods and services in an economy over a period of time. It is typically measured by the percentage change in the price index (such as the Consumer Price Index, CPI) over a specific period, usually a year.

Causes of Inflation

Inflation can be caused by:

• Demand-pull inflation: Excessive demand for goods and services compared to supply, leading to higher prices.
• Cost-push inflation: Rising production costs (e.g., wages, raw materials) forcing businesses to increase prices.
• Built-in inflation: Wage-price spiral where higher wages lead to higher production costs, which in turn raise prices.
• Monetary inflation: Excessive money supply growth without a corresponding increase in goods and services, reducing the value of money.

Effects of Inflation

• Positive effects: Encourages spending and investment, reduces debt burden (if inflation is moderate).
• Negative effects: Reduces purchasing power, increases inequality, distorts savings, and causes economic uncertainty.

Inflation is a key economic indicator that affects consumers, businesses, and policymakers.