Inflation: basics

In short: Inflation refers to the sustained rise in the general price level, causing money to lose purchasing power over time. Moderate inflation is considered normal, but high inflation can cause significant economic problems.

In more detail: The causes of inflation are varied, ranging from too much money in circulation to supply shocks.

In detail

• Demand-pull inflation: When demand rises faster than supply, companies can raise prices without losing customers.
• Cost-push inflation: Increased production costs, for example from higher energy prices, are often passed on to consumers.
• Money supply growth: When the money supply grows faster than economic output, this can lead to inflation over the long term.
• Consumer price index: The consumer price index measures the average price development of a representative basket of goods and serves as the most important inflation indicator.
• Loss of purchasing power: Under inflation, the purchasing power of savings falls unless they are at least compensated by equivalent interest.
• Central bank policy: Central banks try to keep inflation within a target range, usually around two percent, by adjusting the base interest rate.
• Wage-price spiral: If wages rise sharply in response to price increases, companies may raise prices again, which reinforces the process (zentralbank-und-leitzins, wirtschaftswachstum-grundlagen).