Inflation is a big part of our economy and it can lead to many worries and risks. But...

WHAT IS

Inflation is the rate of increase in prices of goods, such as food, and services, such as getting a haircut, over a period of time.

Inflation can be a good thing, but that is when inflation is kept low and prices rise slowly over time, because this means the economy is growing. Around 2% is a good rate. The problem is inflation is unstable. It is the job of the central bank to try and keep it stable.

THE CENTRAL BANK.

Most countries have a central bank. It is run by the government. This bank is not like normal banks that store the money of the people and then lends it out and collects interest to make profit. Instead, the central bank sets the rules or policies that all the other banks have to follow in order to keep the economy growing. For this to happen people need to spend and borrow money.

Federal Reserve Building

CAUSES OF INFLATION.

DEMAND-PULL INFLATION

To get people more likely to spend and borrow money, the central bank lowers interest rates. As well, when the economy is strong, people tend to have a surplus of money, or disposable income, for them to spend. However, there has come a time when people spend faster than businesses can get the goods to their customers. The demand then outpaces the supply. Causing businesses to raise their prices. This is known as demand-pull inflation.

COST-PUSH INFLATION

Another cause for inflation is when business expenses, like the cost of wages and materials, increase. This increase is passed on to the customers. The customers have to then pay more for the goods. This kind of inflation is called cost-push inflation.

Process of manufacturing

COST OF LIVING.

When inflation goes up, the cost of living does too. The cost of living is the amount of money needed to pay for everyday essentials you can't live without. This, however, does not mean that your income increases at the same rate. What you earn does not get you the same amount of goods as it did before the cost of living went up, showing that the value of money is worth less than it was before.

So, $10 can buy you much less now than it did 10 years ago, and in another 10 years it can buy you even less.

RECESSION.

Furthermore, when the value of money continues to be worth less and less quickly, we can fall into a recession or, in the worst cases, a depression.

The central bank was built to avoid this. So, when inflation gets too high, the central bank then raises interest rates to lessen the amount of spending and borrowing, and regulates the economy so it can keep growing.

So, $10 can buy you much less now than it did 10 years ago, and in another 10 years it can buy you even less.

Wrinkled Dollar Bill

INTEREST RATES.

There are also negative effects to increased interest rates. It causes businesses to not want to borrow and invest, as they find it too expensive to do so. This leads to fewer jobs and lower wages, and, in turn, lower confidence in spending and leads to a slower economy. Also, if the rates rise too much too quickly, it can also result in a recession. Having said that, raising interest rates has been an important way to stabilize inflation and keep the economy going.

CONCLUSION.

Inflation impacts an economy and our standard of living. As inflation goes up, so do prices, and when it gets too high even basic necessities will become too expensive to buy. However, when prices go up slowly and inflation is under control, businesses don't have to raise their prices right away, and you can continue to have the confidence to spend and borrow. As well for those who save and invest, understanding inflation and knowing the inflation rate is important as it can reduce the value of your savings and investment returns. So, finding an account or investment that is higher than the inflation rate or increasing the amount of you save and invest in order to make a profit.

REFERENCES.