Inflation

Inflation is the rate at which the general level of prices for goods and services rises over time, resulting in a decrease in the purchasing power of money. When inflation occurs, each unit of currency buys fewer goods and services, affecting consumers, businesses, and the overall economy. Moderate inflation is common in growing economies, but high inflation can reduce the value of savings and disrupt economic stability.

Key Facts

• Measurement: Commonly measured by the Consumer Price Index (CPI) or Producer Price Index (PPI).
• Causes: Can be driven by demand-pull factors (excess demand), cost-push factors (increased production costs), or built-in inflation (wage-price spirals).
• Types: Includes creeping inflation (low and steady), galloping inflation (rapid increase), and hyperinflation (extreme and uncontrolled).
• Effects: Reduces purchasing power, can lead to higher interest rates, impacts savings and investments.
• Control: Central banks use monetary policies like adjusting interest rates to manage inflation.

1. What is inflation?

It is the rise in general price levels that reduces the purchasing power of money.

2. How is inflation measured?

Through indices like the Consumer Price Index (CPI) that track changes in prices of a basket of goods and services.

3. What causes inflation?

Increased demand, rising costs of production, or expectations of higher prices can cause inflation.

4. How does inflation affect consumers?

It makes goods and services more expensive, reducing the value of money saved.

5. How do governments control inflation?

By using monetary policies such as raising interest rates or controlling money supply.