Inflations

Inflation is a sustained increase in the general price level of goods and services in an economy over time, resulting in a fall in the purchasing power of money. The inflation rate is typically measured as the annual percent change in a price index such as the consumer price index (CPI) or the personal consumption expenditures price index (PCE).

Inflations can arise from several forces. Demand-pull inflation occurs when aggregate demand outpaces an economy’s capacity to produce. Cost-push inflation results from higher production costs, such as wages or commodities. Built-in inflation reflects persistent expectations of rising prices and the wage-price spiral. In some episodes, rapid money growth or external shocks can trigger hyperinflation, a situation of very high and accelerating inflation.

Effects include reduced purchasing power, which can harm savers and benefit borrowers with fixed nominal obligations. Inflation can influence interest rates, exchange rates, and the allocation of resources. It also creates uncertainty for households and firms, potentially affecting consumption, investment, and growth.

Policy responses focus on maintaining price stability. Central banks use instruments such as interest rate changes, credible targets, and, in some cases, asset purchases or sales to influence inflation expectations. Fiscal policy and structural reforms can complement monetary measures. In practice, credible policy and transparent communication are important for anchoring expectations.

While inflation is a global phenomenon, the term is often used to describe inflationary episodes in different countries or periods. Economists distinguish between headline inflation and core inflation, which excludes volatile items such as food and energy.