The rate at which prices increase can affect many facets of the economy, from a person’s purchasing power to interest rates on national debt. Understanding and managing inflation is a critical part of fostering economic growth and sustainability.
Inflation Rate
Inflation is often defined as a general increase in the price level of goods and services that consumers purchase, but true inflation is far more complex than this simple definition. Humans need a wide and diversified set of products and a host of services to live, including commodities like food grains, metal, fuel and utilities like electricity and transportation. Because of this, a broad basket of these items is used to measure inflation, which provides an aggregate representation of the impact of relative-price changes on businesses and consumers.
There are two major forms of inflation: cost-push and demand-pull. In the case of cost-push inflation, rising raw materials and labor costs lead to increases in production-related prices for end consumers. For example, during the COVID-19 pandemic, car prices increased rapidly as demand surged and industrial producers were unable to produce cars fast enough.
Demand-pull inflation, on the other hand, occurs when demand for a product or service exceeds its ability to be produced at the current price. This type of inflation is driven by a variety of factors, including increased consumer spending, economic growth and government spending. In this case, the government or private sector may increase their borrowing and lending to help stimulate demand.
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