The inflation rate is the percentage of prices that rise over time. A basket of economic goods and services is often used to measure inflation; as the prices in that basket increase, so does the inflation rate. It’s important to understand what causes inflation, and what effects it has on businesses and individuals.
One cause of inflation is cost-push. When companies’ costs to produce and ship goods and services rise, they have little choice but to pass those increases on to consumers in the form of higher prices. This type of inflation was common during the COVID-19 pandemic, as high consumer demand combined with supply chain disruptions and shelter-in-place delays led to a dramatic price spike for basic products like food, water, and energy.
Another cause of inflation is wage-push, which happens when workers demand higher pay to offset the rising cost of goods and services. This type of inflation has historically been more stable and can be tamed by the careful use of monetary policy, such as increasing or decreasing the amount of money in circulation.
Unstable and unpredictable inflation rates can be harmful to a country’s economy. They make it difficult for businesses to budget and plan long-term, as prices and costs tend to change rapidly. This can also discourage investment, as investors might believe that the purchasing power of their money will decline, leading them to hold onto it instead of investing in machinery or other assets.