Understanding How Inflation Works

Understanding How Inflation Works

(DailyDig.com) – We all have to deal with inflation. It’s often a sign of a growing economy, but sometimes it can continue even when the economy stops growing. To better understand the economy, we need to understand how inflation works. So, let’s talk about inflation.

What Is Inflation?

Depending on your age, you may realize money doesn’t have the same buying power it used to; this is because of inflation. The definition of inflation is simply “the decline of purchasing power of a given currency over time,” meaning that it’s not your imagination that your money just doesn’t go as far as it used to. In addition to the value of a currency falling, inflation, as the name suggests, sees an increase in the prices of goods and services. With inflation, there are three causes.


Demand-pull inflation is actually quite simple. The demand for certain goods or services increases, but the supply remains the same, causing the prices of those products to increase. Competition for products grows, and companies increase their workload in an attempt to increase production and make more money. Demand-pull can also result from the popularity of a certain product increasing rapidly, causing companies to work harder to make more, therefore increasing the prices.

Cost-Push Inflation

The easiest product to see this kind of inflation through is oil. We need fuel for our vehicles, so the demand stays the same. However, the supply of this product is limited in some fashion, usually due to international treaties and disasters. This effectively pushes the price of gas and oil products up.

Built-In Inflation

We often expect to see the prices of products continue to inflate, which leads us to wanting to be paid more for our work. Most of the time it’s to maintain the cost of living. However, requests for higher wages directly affect the pricing of products, resulting in inflated prices. Many companies raise prices to continue to profit while keeping their employees happy.

Why Inflation Is a Good Thing

Now, obviously nobody wants to see the value of their money decrease. Fortunately, inflation is a sign of a healthy economy according to economists. Moderate inflation encourages people to spend and invest their money rather than storing it and watching it slowly lose value. Invest your money into items and assets that you’ll see a return on, effectively increasing your value. The buying and selling of products is what makes the economy function properly and flourish.

Now, not all inflation is good. As mentioned earlier, moderate inflation is a good thing; although, hyperinflation and stagflation are not. Hyperinflation occurs when prices increase rapidly while the value of currency decreases substantially, resulting in overpriced products that people don’t want to invest in or spend their money on. Stagflation occurs when the value of a currency decreases, but prices increase — a sure sign the economy is at a standstill or not growing.

Inflation can work for or against us. At the end of the day, inflation is what makes people want to use their money, further causing the economy to grow. Economic growth is important, as a growing economy is an improving economy.

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