What Is Inflation?

Inflation is one of the most powerful economic indicators, yet it’s also one of the easiest to misunderstand.

Inflation is a rise in prices that exceeds the rate of general price increases. Prices are changing all the time for various reasons. When prices rise, it means that there’s more money chasing after fewer goods, making each good cheaper relative to how much money exists.

Inflation is one of the most powerful economic indicators, yet it’s also one of the easiest to misunderstand. Simply put, inflation is a general increase in prices for goods and services caused by the rise in the overall level of demand within an economy.

There are limitations to this definition, though. The main issue is that prices typically rise simply because producers are greedy- not because more people with lots of money are trying to buy things. Still, this doesn’t explain why some economies experience inflation but its countries next door don’t feel it at all Inflation is an increase in the total supply of money where prices level out.

What this means is that if more money is added to the economy, then it becomes diluted which causes prices to grow on average at a slower rate compared to previous inflation rates. For example, if $1,000 increases 10% per year for three years, the new $1,100 probably won’t buy as much as $1,000 did originally.

Inflation is a term used to describe an economic situation where buying power decreases as the cost of living increases. It does not affect everyone equally and those in high-income brackets are far less likely to struggle when inflation happens for this reason.

The best way to keep your money value at its highest is to keep the economy running smoothly by having a central bank control inflation. If it is allowed, inflation will make the average American less wealthy over time because it will reduce the value of their earnings by creating an ever-increasing need for more money.

The Federal Reserve intercedes here by raising or lowering the funds' rate which allows banks to loan money at lower or higher interest rates. Inflation…

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