Inflation - Prices on the Rise

Definition, causes, effects

What does ‘inflation’ mean?
Inflation is the decline of
purchasing power of a given
currency over time. It is the rate
at which the value of a currency is
falling and, consequently, the
general level of prices for goods
and services is rising. It measures
how much more expensive a set
of goods and services has become
over a certain period, usually a
year.
What causes inflation?

Demand- Demand-pull inflation happens when the demand for certain goods and
services is greater than the economy's ability to meet those demands.
pull When this demand outpaces supply, there's an upward pressure on
inflation prices — causing inflation.

Cost-push Cost-push inflation is the increase of prices when the cost of wages and
materials goes up. These costs are often passed down to consumers in
inflation the form of higher prices for those goods and services.

Increased money supply is defined as the total amount of money in

Increased circulation, which includes cash, coins, and balances and bank accounts
money according to the Federal Reserve. If the money supply increases faster
than the rate of production, this could result in inflation, particularly
supply demand-pull inflation because there will be too many dollars chasing
too few products.
 Fun Fact
Inflation is known as a lagging indicator, which means that
it provides information on something that has already
occurred and is used to confirm information as opposed to
forecasting.
What are the effects of inflation?

Inflation not only affects the

cost of living – things such as
transport, electricity and food
– but it can also impact
interest rates on savings
accounts, the performance of
companies and in-turn, share
prices. As measures of
inflation rise, this reflects a
reduction in the purchasing
power of your money.
Inflation rate hits 657% for past 50 years
Economic concepts related to inflation
• Deflation – a fall in the general price level

• Disinflation – a decrease in the rate of inflation

• Hyperinflation – an out-of-control inflationary spiral

• Stagflation – a combination of inflation, slow economic growth and high

unemployment

• Reflation – an attempt to raise the general level of prices to counteract

deflationary pressures