Inflation is the general rise in prices over time, which reduces the purchasing power of money. It means that the same amount of money buys fewer goods and services than before. Inflation is usually measured using indicators like the Consumer Price Index, which tracks changes in the cost of everyday items.
There are three main causes of inflation. First, demand-pull inflation happens when demand is higher than supply. Second, cost-push inflation occurs when production costs increase, leading businesses to raise prices. Third, built-in inflation is driven by expectations, where rising wages and prices reinforce each other.
Inflation has both positive and negative effects. Moderate inflation supports economic growth by encouraging spending and investment. However, high inflation reduces purchasing power, increases uncertainty, and can harm people with fixed incomes.
To control inflation, central banks use monetary policy, especially by adjusting interest rates. Higher interest rates reduce spending and help lower inflation, while lower rates encourage economic activity. Managing inflation is important to maintain economic stability and protect peoples standard of living.
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