Inflation

Inflation is the rate at which the general level of prices for goods and services rises over time, leading to a decrease in the purchasing power of money. In other words, when inflation occurs, each unit of currency buys fewer goods and services than it did before. Central banks and governments closely monitor inflation because it affects the economy’s overall health, consumer behavior, and monetary policy decisions.

There are several causes of inflation. Demand-pull inflation happens when consumer demand exceeds supply, driving prices up. Cost-push inflation occurs when production costs—like wages or raw materials—increase, forcing businesses to raise prices. Inflation can also result from increased money supply, where more money is circulating in the economy without a corresponding rise in goods and services.

Moderate inflation is generally seen as a sign of a growing economy, but excessive inflation can reduce the value of savings and hurt consumers. On the other hand, deflation—a drop in prices—can lead to economic slowdown. Central banks, such as the Federal Reserve or the European Central Bank, use tools like interest rate adjustments and quantitative easing to keep inflation within a target range, usually around 2%. Traders and investors pay close attention to inflation data, as it can heavily influence interest rates, currency values, and overall market sentiment.

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