Inflation
Inflation is a sustained increase in the general level of prices across an economy. As prices rise, each unit of currency buys fewer goods and services, meaning the purchasing power of money falls. Inflation is normally measured using the percentage change in a price index, such as the Consumer Price Index, over a particular period.
What causes inflation?
Inflation can arise for several reasons. Strong demand may push prices higher when businesses struggle to increase supply quickly enough. Costs such as wages, energy or raw materials may also rise and be passed on to consumers.
Inflation can also become more persistent if businesses and workers begin to expect prices to continue rising and adjust prices and wages accordingly.
Inflation, disinflation and deflation
These terms describe different movements in the general price level:
- Inflation: prices are rising.
- Disinflation: prices are still rising, but at a slower rate.
- Deflation: the overall price level is falling.
This distinction is important. A fall in the inflation rate from 6% to 3%, for example, does not mean prices have fallen. It means they are increasing more slowly.