Inflation is the rate at which the general level of prices rises over time. A little of it is considered normal in a growing economy. Too much erodes purchasing power, complicates planning and forces central banks to act.
Demand-pull and cost-push
Prices rise when demand outpaces what the economy can supply, or when the cost of producing goods — energy, materials, labour — increases and companies pass it on. Most real episodes involve a mix of both.
How it is measured
Statistical agencies track the price of a representative basket of goods and services. Economists also watch “core” measures that exclude volatile items such as food and energy to see the underlying trend.
Why expectations matter
If businesses and workers expect prices to keep rising, they set prices and negotiate wages accordingly, which can make inflation self-reinforcing. Central banks work hard to keep those expectations anchored.
Key takeaways
- Demand-pull and cost-push
- How it is measured
- Why expectations matter
