Inflation is the sustained rise in an economy’s general price level for goods and services. A loss of real value in the medium of exchange and unit of account inside an economy is what we mean when we talk about inflation. When the general price level rises, each unit of currency buys less products and services.
Inflation is often measured by the yearly percentage change in a broad price index (typically the consumer price index) over a given time period.
Inflation can be induced by a number of circumstances, such as a rise in the quantity of money, an increase in government expenditure, or an increase in the price of oil or other items used in the production of other goods and services.
Central banks, such as the Federal Reserve in the United States, attempt to maintain low and stable rates of inflation to help promote economic growth and stability.
What is the most common cause of inflation?
There is no one single cause of inflation that is most common, as the factors that contribute to inflation can vary depending on the specific economic and monetary conditions of a country.
However, an increase in the money supply is one of the most common drivers of inflation. Prices tend to rise when the supply of money in an economy grows faster than the supply of products and services, because consumers have more money to spend on the same number of commodities. This can happen when a central bank, such as the Federal Reserve, expands the money supply via a process known as monetary expansion.
Increases in government spending, increases in the price of raw materials or energy, and an increase in the cost of labor are all potential drivers of inflation. Expectations can also cause inflation, such as when people expect prices to grow in the future and are willing to pay more for products and services today.
Finally, supply shocks, such as a rapid fall in the availability of a vital product, can generate inflation, resulting in increased prices.