Finance
How does inflation happen?
Inflation happens when overall demand for goods and services outpaces supply, or when the money supply grows faster than the economy — so more money chases the same goods, and prices rise.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how inflation works.
Step by step
- 1Demand-pull: too much spending chasing too few goods pushes prices up.
- 2Cost-push: rising production costs (like oil) raise prices.
- 3Expanding the money supply too fast can devalue each unit of currency.
- 4Central banks raise interest rates to cool demand and slow inflation.
Frequently asked questions
- What are the main causes of inflation?
- Demand outpacing supply (demand-pull), rising costs (cost-push), and excessive money-supply growth.
- How do central banks control inflation?
- Mainly by raising interest rates, which cools borrowing and spending, easing upward pressure on prices.
- Is some inflation normal?
- Yes — most central banks target around 2% as healthy for a growing economy.