Finance
What is Inflation?
Inflation is the rate at which the general level of prices rises over time, which means each unit of money buys a little less than before. Moderate inflation is normal in a growing economy; very high inflation erodes savings quickly.
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Watch a 2-minute lesson with voice + animation that explains inflation.
Key things to understand
- 1It's usually measured by a price index like the Consumer Price Index (CPI), which tracks a basket of everyday goods.
- 2Demand-pull inflation happens when demand outpaces supply; cost-push inflation comes from rising production costs.
- 3Central banks often target around 2% inflation and raise interest rates to cool it when it climbs too high.
- 4Inflation reduces the purchasing power of cash, which is why long-term savings are often invested.
Frequently asked questions
- Why do central banks want some inflation?
- A small, steady rise in prices encourages spending and investment and gives a buffer against deflation, which can be more damaging.
- How does inflation affect my savings?
- If your money earns less than the inflation rate, its real purchasing power shrinks over time even though the number stays the same.
- What causes high inflation?
- Rapid money-supply growth, supply shocks (like an oil-price spike), or demand far exceeding what the economy can produce.