What Is Inflation?

(United Reader) – Most people have heard of inflation, but we might not know what it actually is. Notice how the price of milk has increased over the years? Or maybe you’ve noticed that money doesn’t make it as far as it used to. Whatever the case may be, you can thank inflation for that. But what is it and how does it work?


The definition of inflation is pretty simple: The value of a currency loses buying power over time. In other words, prices increase while the value of money stagnates or decreases. There are three types of inflation: demand-pull, built-in, and cost-push. Each of these classifications affects the economy differently.

Inflation can be positive or negative depending on the perspective. For example, someone holding stocked commodities, property and other tangible assets may enjoy inflation as it increases the value of their assets. However, someone who’s holding cash isn’t going to like inflation as it decreases the value of their holdings.

There’s a certain balance that needs to be kept when it comes to inflation in order to promote spending. There’s nothing wrong with saving money, but a certain spending level is needed to nurture economic growth.

Causes of Inflation

Inflation is often the result of an increased supply of money. However, as mentioned before, it has three main causes. Let’s take a closer look.

Cost-Push Inflation

In this scenario, prices increase due to the supply of goods or services being limited, but demand remains the same. As a result, prices go up. Typically, this type of inflation is the result of negative effects on the supply chain from devastating events such as natural disasters or pandemics, which can impede a company’s ability to keep up with demand.

Oil prices are a great example, as just about everyone needs some sort of fuel. Disasters and even international treaties can decrease the amount of oil we have available, which leads to higher fuel costs.


Demand-pull inflation can be caused by a number of other factors that increase product demand. For example, an economy in good health results in higher wages as people and companies earn more money; this increase in income results in more buying power, meaning consumers can buy more than they could before.

As a result, the competition for existing goods increases, which increases the prices while supply companies crank up their production. Demand-pull can occur on a smaller scale as well, where prices increase as a result in the popularity of certain products.


People expect that the current rate of inflation will continue into the future, which makes them want more money for their work to cover their cost of living. Their increased wages result in the prices of goods and services also increasing. Built-in inflation is an endless cycle of wage and price increases that continues to spiral as one feeds the other and vice-versa.

Inflation can destroy an economy when it gets out of hand. For example, in 2018, Venezuela saw an inflation rate of over 1,000,000% a month; this unchecked inflation resulted in their economy collapsing and many citizens fleeing the country.

Inflation may seem bad, and it is for many of us. After all, why would you want your money to lose value? Well, economists actually believe that a small amount of inflation is the result of a growing and healthy economy, which we don’t need to explain is a good thing. Inflation makes people want to invest or spend their money rather than save it and watch its value decrease; when used effectively, it can be one more tool toward achieving the American Dream.

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