What is inflation?

In a nutshell

Inflation is a rise in prices (and therefore a decline in purchasing power) over time. In other words, if the average price of a basket of selected goods and services increases over time, then a unit of currency (e.g., 1 British Pound) gets you less than it did before.

What causes inflation?

Demand-Pull effect

When demand exceeds supply, prices tend to increase as consumers compete for limited resources.

Cost-Push effect

Production costs for business increasees leading businesses to push some of the burden to consumers by increasing prices.

Built-in inflation

More money is in circulation (maybe the government prints more money or lower interest rates lead to more borrowing) which leads to increased spending which leads to businesses raising prices to cash in.

Sources

• Inflation – Investopedia