What Is Inflation?

Inflation is defined as "a general increase in prices in an economy over time."

Remember when gas cost only ten cents per liter? We don’t either. So why are prices so high nowadays? This trend, known as inflation, has affected many goods and services for a long time. This page will cover why inflation exists, the causes of inflation, and how it affects you.

What are the causes of Inflation?

Inflation can take two main forms:

Cost-push inflation: A production cost increase that encourages companies to increase their selling cost to customers. For example, if cotton was harder to produce, the price of clothing would rise.

Demand-pull inflation: Lack of supply leads to higher demand and the product becomes more valuable. E.g., if there were less clothes in stores, the price would rise as consumers all want the same product.

How do we measure Inflation?

The rate of change in prices is measured by the Consumer Price Index (CPI). The CPI uses U.S. consumers to track how much is being paid for something each month. The Bureau of Labor Statistics (BLS) uses a weighted average of the price of goods and services, or a basket, to represent average consumer spending.

How does Inflation affect us?

Inflation lowers a consumer's purchasing power, which is what they can buy with the usual amount of money they have. This decline makes it harder for people who work at the same wage to keep up the same basket of items they want because they have to pay more for each unit. However, inflation can have its benefits. Having some balancing factor to deflation and prices lowering helps money keep its value and encourages businesses to invest in new and better products. It also encourages consumers to buy these products so prices don't go higher, which boosts economic growth.