Inflation is the general increase in prices of goods and services in a country. This is usually measured by the Consumer Price Index (CPI), which compares prices of a basket of goods and services from one period to another. It is an important economic phenomenon because it erodes the purchasing power of money and can slow down the economy’s growth.
The causes of inflation vary between countries and over time. Some of them are purely economic (like oil shocks or a sudden jump in energy prices). Others can be related to political issues or government policies. A sustained high level of inflation is generally seen as harmful to an economy because it adds inefficiencies and makes it difficult for businesses to plan long-term. Inflation can also discourage saving because individuals are uncertain about the future purchasing power of their savings.
Lastly, inflation can lead to wage-price spirals where people assume that prices will continue to rise so they demand higher wages and stock up on goods. Inflation can be hard to control because it can be difficult to predict and respond to quickly.
Inflation affects all aspects of the economy including influencing people’s purchasing power, impacting economic growth and raising or lowering interest rates on debt. It is therefore an essential factor to understand for everyone from central bankers to politicians.