Inflation defined: What is it, what causes it, and what is hyperinflation?
Description
Inflationary headwinds have clouded economic forecasts as a new report brings mixed news.
Inflation ran hot for a third consecutive month in March, raising questions about when the Federal Reserve can begin cutting interest rates. Overall prices increased 3.5% from a year earlier, according to the Labor Department’s consumer price index.
Though inflation has cooled from post-pandemic highs of 9.1%, the topic remains a political factor.
Inflation is the decline of purchasing power in an economy caused by rising prices, according to Investopedia.
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The root of inflation is an increase in an economy's money supply that allows more people to enter markets for goods, driving prices higher.
Inflation in the United States is measured by the Consumer Price Index (CPI), which bundles together commonly purchased goods and services and tracks the change in prices.
A slowdown in inflation is called disinflation and a reduction in prices is called deflation.
What causes inflation?
Inflationary causes include:
- Demand pull: An inflationary cycle caused by demand outpacing production capabilities that leads to prices rising
- Cost-push effect: An inflationary effect where production costs are pushed into the final cost
- Built-in inflation: An increase in inflation as a result of people bargaining to maintain their purchasing power
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