What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. This means that over time, the same amount of money will buy fewer goods or services.

Causes of Inflation

There are various factors that can contribute to inflation, including:

• Demand-Pull Inflation: When the demand for goods and services exceeds their supply, prices tend to rise.
• Cost-Push Inflation: When the cost of production increases, businesses often pass on these costs to consumers in the form of higher prices.
• Monetary Inflation: When the money supply in an economy increases faster than the growth of the economy, it can lead to inflation.

Effects of Inflation

Inflation can have several effects on an economy, including:

• Reduced Purchasing Power: As prices rise, the purchasing power of consumers decreases, leading to a decline in real income.
• Uncertainty: Inflation can create uncertainty about future price levels and can impact investment decisions.
• Interest Rates: Central banks often raise interest rates to combat inflation, which can impact borrowing and investment.

Overall, inflation is an important economic indicator that can have a significant impact on individuals, businesses, and the overall economy.