If your money doesn’t stretch as far as it used to, it may not be your imagination: Inflation is a common and normal part of the world’s economic cycles. It’s when the prices of a basket of goods and services rise, eroding the purchasing power of consumers and businesses alike.
Inflation happens when the rate of consumer demand for a good or service exceeds the amount that can be produced and sold at current production costs. This is called “demand-pull inflation.”
Cost-push inflation, on the other hand, is when the supply chain can’t keep up with demand, or when natural disasters or other unrelated events reduce the quantity of available supplies and drive up the price of the remaining stock. This is also called “sticky” inflation.
Humans need a wide variety of products and services to live, from commodities like food grains and metal to utilities like electricity and fuel, as well as personal care and entertainment. A standard measure of inflation takes a weighted average of those prices to produce an overall index number that compares changes over time. This allows statisticians to calculate the change in a basket of items, rather than comparing the prices of individual goods or services.
High inflation causes a loss of purchasing power for all consumers, forcing them to tighten their budgets and reduce spending. Businesses also suffer as they have to pay higher prices for raw materials and adjust their pricing to cover rising costs. Inflation can also harm importers as it makes foreign-made goods more expensive, and it can hurt savers who see the real value of their savings erode.
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