Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
There are two main causes of inflation: Demand-pull and Cost-push. Both are responsible for a general rise in prices in an economy. But they work differently. Demand-pull conditions occur when demand from consumers pulls prices up.
What Causes Inflation?
There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.
Inflation happens when the price of goods and services increase, while deflation takes place when the price of the goods and services decrease in the country. Inflation and deflation are the opposite sides of the same coin.
Inflation, in the basic sense, is a rise in price levels. Economists believe inflation comes about when the supply of money is greater than the demand for money. Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth.
Inflation allows borrowers to pay lenders back with money that is worth less than it was when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, which benefits lenders.
When that happens, your purchasing power or capacity to buy declines. Inflation might force you to cut out luxuries and “tighten your belt” to keep up with the rising cost-of-living. These small increases in expenses can also reduce your disposable income and erode the value of your savings over time.
The simple definition of inflation is the sustained upward movement in the overall price level of goods and services in the economy. It has the effect of devaluing a particular currency.
Inflation Proof Investments
Yet No Comments