Inflation is the term used for explaining prices rising over time and purchasing power falling. Let's view the following scenario: Take a trip to the grocery store for example. Buying a cart of products today will set you back $100 today. A year from now you buy all the same items but they now cost $103. That is inflation, 3% inflation to be exact.
What causes inflation?
One of the main causes of inflation is a rise in production costs. For example, rising energy prices can drive up the costs of manufacturing and transportation. Rising wages can also contribute to inflation and we see that in situations where business owners have to pay workers more they might also increase the prices of their products in order to make up for those higher labor costs. Inflation also occurs when the demand for goods exceeds supply. Then businesses selling those items can increase prices.
Pros/Cons of Inflation?
Prices going up slowly is generally considered a good thing, especially if wages go up as well. This mechanism helps keep the economy dynamic and growing. The US central bank even has a target inflation rate: 2%. Regrettably there is a very thin line to keeping inflation positive for the economy. Inflation can quickly get out of control when governments print too much money to pay for spending when not enough real value underlines that new paper prices surge! This happened in Germany in the year 1921, occurred in Zimbabwe in 2008 and most recently in Venezuela in 2016. It's the Central Bank's job to make sure it keeps inflation on track. CBs have the power to adjust different financial levers in order to keep inflation under control. For example, by adjusting interest rates, the Central Banks can temper or accelerate interest in investment thus controlling the % of inflation.
Inflation made easy to understand!
