Never Understood Inflation? Here's Your 101
Visit any news site and there's a good chance you'll read something about inflation.
However, some people say inflation is one of those things they've never really understood — and have been too afraid to ask about!
If you're one of those people, here's a short introduction.
Inflation is an increase in prices over time. You see its effect when the price of an item goes up.
For example, your bread cost $2 last year, but now it's $2.20. And if your salary didn't rise by the same amount, you can't buy as much bread anymore — meaning your money doesn't have as much "purchasing power" as it used to.
There are a number of different things that can cause prices to rise.
One of the most important things is when there's a big difference between the demand for goods and services and the supply of those goods and services.
Changes in supply and demand can be caused by problems around the world, or by events in a particular country.
The war in Ukraine had an effect on inflation because it affected the supply of many goods.
The supply of wheat, for example, decreased, but there was still lots of demand for bread, so prices went up.
One of the things countries do to try to reduce inflation is to encourage people to keep their money in their pockets, often by increasing interest rates.
The idea is to decrease demand: higher interest rates make borrowing more expensive, so people and businesses are less likely to spend money, especially on big things like cars, houses and buildings.
So inflation is always bad, right?
Well, a small amount of inflation is believed to be good — it shows that people and businesses are making more money. But if prices go up too quickly, inflation can hurt everyone.
