Inflation is the slow decrease in how much you can buy with your money, shown by a general increase in prices for things and services over time. The inflation rate measures how much the average price of a group of chosen goods and services goes up in a year. When inflation is high, prices rise fast; when it is low, prices rise slowly. Inflation is different from deflation, which happens when prices go down and you can buy more with your money. You can learn more about Inflation below.
Learn more about Inflation
More money in the economy causes inflation, and this can happen in various ways. The monetary authorities can raise a country’s money supply by:
- Creating and distributing more money to people
- Legally lowering the value of the official currency
- Issuing new money as reserve account credits in banks by buying government bonds from banks in the secondary market.
Inflation can also happen due to supply issues and a lack of important products, leading to higher prices.
When inflation happens, money can buy less than before. This can affect any part of the economy. Just the thought of inflation can make things worse. Workers might ask for more pay, and companies might raise their prices, expecting inflation to continue. This creates a cycle that keeps driving prices higher.
Types of Inflation
- demand-pull inflation
- cost-push inflation
- built-in inflation
Inflation Good or Bad?
High inflation is usually seen as negative for the economy, and low inflation can also be damaging. Many economists suggest aiming for a balance with low to moderate inflation, ideally around 2% each year.
In general, high inflation is bad for savers since it reduces the value of their saved money. On the other hand, it can help borrowers because the real value of their debts decreases over time.
Why Is Inflation So High?
In 2022, inflation hit its highest point globally since the early 1980s. There isn’t just one cause for this quick increase in prices; instead, several events combined to push inflation up significantly.
The COVID-19 pandemic caused lockdowns and restrictions that severely affected global supply chains, leading to factory shutdowns and delays at shipping ports. To help people and small businesses cope with the financial strain, governments provided stimulus checks and raised unemployment benefits. As vaccines became widely available and the economy recovered, demand surged, partly due to stimulus funds and low interest rates, while supply struggled to return to its pre-COVID state.
Russia invaded Ukraine without cause in early 2022, resulting in economic sanctions and trade limits on Russia. This affected global oil and gas supplies since Russia is a major fossil fuel producer. Additionally, food prices increased because Ukraine, a key grain exporter, could not ship its large harvests. The rise in fuel and food costs caused further price increases throughout the economy. To address high inflation, the Federal Reserve raised interest rates, which dropped significantly in 2023 but still stayed above levels seen before the pandemic.
Conclusion
Inflation means that prices go up, which makes money buy less over time. It’s a normal part of the economy, and the U.S. government aims for a 2% inflation rate each year. However, if inflation rises too quickly or too high, it can become a problem.
Inflation increases the cost of goods, especially when wages don’t keep up. It also reduces the value of certain assets, particularly cash. To manage inflation, governments and central banks use monetary policy.