Inflation – Causes and Effects

Inflation Causes and Effects

The term “Inflation: Causes and Effects” describes a rise in the prices of goods and services across the economy over time. As a result, the purchasing power of your money (or whatever currency you use to buy things) tends to decrease over time. The Consumer Price Index (CPI) monitors changes in the prices of a basket of items such as food, energy, housing and transportation to get a sense of how inflation is impacting an economy.

Deflation is the opposite of inflation, and it happens when costs decrease over time. Deflation can be good or bad for consumers depending on the circumstances. For example, if home-building demand surges and builders are able to charge higher prices for their homes, that can give the companies greater profit margins. In addition, if interest rates decline because of deflation, it can be easier for homeowners to qualify for mortgages to purchase new homes or do cash-out refinances. This can fuel economic growth.

Monetary Policy and Markets: Unraveling the Relationship”

On the other hand, if prices decline because of a collapse in demand, it can create an economic slump. The lack of spending can lead to job losses and lower economic growth.

People with low incomes often feel the effects of inflation the most. That’s because they spend a larger portion of their paychecks on essentials like food and energy, which tend to increase in price during periods of inflation. In addition, they may not have access to investments like stocks and real estate that can provide returns that outpace inflation.