Introduction
Inflation is defined as the rate at which prices rise over time. It is one of the most fundamental economic concepts, with implications ranging from personal and national finances to the value of your assets and investments. So, how exactly does inflation work? How is it calculated? What impact will it have on your money and your life? We will go over all of that and more in this post, and after reading it, you will be able to answer the question “what exactly is inflation?”
Inflation is a sustained rise in the general level of prices of goods and services in an economy over a period of time. It measures how much more money you need to buy things at the end of your trip than at the beginning.
What causes inflation?
Inflation may be caused by an increase in the money supply, an increase in overall demand for goods and services, or an increase in production costs. When a central bank increases money supply (either by printing more money or by lending new money), the value of current money falls. People having more money (due to greater supply or a time of economic expansion) may cause demand to outpace supply, causing the price level to rise. Increased production costs (due to a variety of factors such as natural disasters, war, and so on) are passed on to consumers, resulting in inflation.
What impact does inflation have?
Inflation has a wide-ranging impact on the economy. It raises the cost of life for individuals and businesses, for example. This means you will have to pay more for goods and services. It also implies that businesses must demand higher prices for their products in order to continue in business, which forces them to lay off workers or lower pay. Inflationary pressures can trigger a recession if people do not have enough money to spend on items like cars or houses because they are spending so much on food, clothing, and utilities (electricity).
Inflation also has an impact on financial markets, such as stocks, because investors want to invest in companies with bigger earnings in order to maximise their returns. As inflation rises, the value of these assets falls, implying that investors would rather sell them now than wait until later, when they may be worth even less due to higher prices caused by inflationary pressures from increased demand caused primarily, but not exclusively, by central banks trying desperately, if somewhat unsuccessfully, to maintain control over something that no one has ever successfully managed.
Conclusion
As you see, this is a difficult question! However, I believe it is safe to conclude that inflation is a critical component of every economy and can effect a wide range of people. It has an impact on our daily lives by changing the prices of products and services, which implies that we will all face inflation at some point. However, most economists agree that modest levels of inflation (around 2%) are healthy for the economy – they help keep things steady and developing, which can benefit everyone involved. In contrast, high levels of inflation could create a crisis that is hard to manage as people struggle to pay their bills, especially in unstable times (during recessions, conflicts or other major events).
Nikos Tzivanakis 