Inflation
Inflation is the sustained increase in the general price level of goods and services over time. As inflation rises, the purchasing power of money falls—meaning the same amount of money buys fewer goods and services.
Example
A loaf of bread costs $2 today.
If inflation is 5% over the next year, the same loaf may cost about $2.10.
Your money buys slightly less than before.
Main causes of inflation
Demand-pull inflation: Demand for goods and services exceeds supply.
Cost-push inflation: Production costs (such as wages or raw materials) increase, leading businesses to raise prices.
Built-in inflation: Workers demand higher wages to keep up with rising prices, and businesses increase prices to cover higher labor costs.
Effects of inflation
Positive (when low and stable):
Encourages spending and investment.
Supports economic growth.
Negative (when high or unpredictable):
Reduces purchasing power.
Increases the cost of living.
Creates uncertainty for businesses and households.
Can reduce the real value of savings if interest rates don't keep up.