What is Inflation?

Inflation is the increase in the cost of goods and the decrease in the buying power of a denomination of currency. Inflation is measured in a few ways, and one is by the cost of a broad basket of consumer goods.

Increases year to year are reflected as the rate of the Consumer Price Index (CPI), but be mindful that there are other indexes. Inflation is not only the effect of the cost of goods rising, but of the actual buying power of a currency decreasing.

There are natural, normal, healthy levels of inflation, and there can also be runaway hyperinflation where a currency effectively ceases to have value. Two specific kinds of inflation are demand-pull and cost-push inflation.

Demand-pull is when an increased demand, perhaps due to increasing employment levels, causes prices to rise. Cost-push inflation occurs when the cost of producing goods rises in a market and the supply is decreased, causing the price of goods produced to rise.