Inflation

Inflation is a sustained increase in the general price level of an economy over time. When prices rise, the same amount of money buys fewer goods – the purchasing power of money declines.

Measurement

Inflation is usually measured with a consumer price index, which tracks the price of a representative basket of goods. The annual inflation rate states by what percentage this index has risen.

Causes

• Demand-pull: Demand outpaces supply.
• Cost-push: Rising production costs (e.g. energy) are passed on.
• Monetary: The money supply grows faster than economic output.

Central banks typically aim for a low, stable inflation rate (often around two percent) to secure both price stability and growth.