Question

what is inflation

Answer 1

persistance increase in price

Answer 2

Inflation is the general rise in the price level of goods and services in an economy over time. When inflation occurs, each unit of currency buys fewer goods and services — in other words, purchasing power falls.

Key points

- How it’s measured
- Inflation rate = (Price level now − Price level before) / Price level before × 100%.
- Common measures: Consumer Price Index (CPI) — tracks a basket of consumer goods and services; Producer Price Index (PPI); GDP deflator (broader economy-wide measure).
- Headline inflation includes all items; core inflation excludes volatile items (food, energy) to show underlying trend.

- Main causes
- Demand-pull inflation: aggregate demand in the economy outstrips supply (too much money chasing too few goods).
- Cost-push inflation: rising production costs (wages, raw materials, energy) push firms to raise prices.
- Built-in (wage-price) inflation: workers demand higher wages to keep up with prices, and firms raise prices to cover wage costs, creating a feedback loop.
- Monetary factors: rapid growth in the money supply can fuel inflation if it exceeds real output growth.
- Supply shocks (e.g., crop failures, sudden energy price spikes) can cause temporary jumps in prices.

- Effects
- Reduces real value of money and fixed nominal incomes (hurts savers and those on fixed pensions).
- Can benefit borrowers if nominal interest rates are lower than inflation (real debt burden falls).
- Creates uncertainty that may reduce investment and long-term planning.
- Redistribution of income and wealth; effects depend on who can adjust wages or hold inflation-protected assets.

- How policymakers respond
- Central banks (e.g., Federal Reserve, ECB) use interest-rate policy: raising rates to cool demand and lower inflation, cutting rates to stimulate demand.
- Inflation targeting: many central banks aim for a low, stable inflation rate (commonly ~2%) to balance price stability and economic growth.
- Fiscal policy and supply-side reforms can also affect inflation over time.

- Extreme cases
- Hyperinflation: extremely fast, out-of-control inflation (often due to fiscal collapse, excessive money printing).
- Deflation: falling price levels, which can increase real debt burdens and discourage spending.

Practical note for individuals
- Real incomes matter more than nominal ones. Protecting purchasing power can involve negotiating wage increases, holding some inflation-protected assets (indexed bonds, real assets), and diversifying investments.

Summary
Inflation is the ongoing rise in prices that reduces money’s purchasing power. It’s measured by indices like the CPI, caused by demand or supply dynamics and monetary factors, and managed mainly through central-bank policy. Moderate, predictable inflation is generally considered normal in growing economies; very high or very low inflation can be harmful.