Inflation is the overall increase in prices across a wide range of economic goods and services. It is measured by tracking the change in the Consumer Price Index (CPI), which combines the prices of a basket of economic goods that consumers purchase. These items are chosen to represent a broad range of consumer needs, including food, utilities like electricity and transportation, and services such as healthcare and entertainment.
Inflating prices can make it more challenging to afford basic necessities such as food and shelter. This is especially true for people on fixed incomes, like seniors or those living on a pension. High inflation can also reduce the purchasing power of currency, making it more difficult to buy products and services with a single monetary unit. This is what makes it important for central banks to monitor and respond to inflation, reducing the value of currency and making things more affordable.
The most common cause of inflation is higher energy prices. This can make manufacturing operations more expensive and drive up the prices of finished goods, which companies then pass along to consumers. This is known as cost-push inflation.
Other causes include natural disasters and major world events that disrupt supply chains. These may lead to shortages of goods that are in high demand, driving up prices on the limited stock available. Rising inflation expectations can also push up prices, as businesses and workers build price increases into wage negotiations or contractual pricing for future years.