The causes and effects of Inflation

Inflation has always been a key part of our economy, historically and financially. The so called ‘value of money’ is constantly changing, and in turn shaping our lives and society. We often hear a lot about inflation on the news, but what exactly is it?

a man rising coins symbolising inflation

Put simply, inflation is when the general price of goods and or services in a country rises.

Put simply, inflation is when the general price of goods and or services in a country rises. In times of inflation, things get more expensive to buy. In theory, this should also mean that the wages of the workers producing the goods increase as well.

Unfortunately, this isn’t always the case. Inflation is often a time when the CEOs and large corporations can take great advantage of inflationary crisis. In recent years, we’ve seen inflation across the US economy, yet we’ve also had the average wage stagnating. What does this mean for the workers? It means that things become more expensive to buy, and they don’t have more money to compensate for this rise in price. Generally, this can lead to a stagnation or decline in the standard of living.

How is it caused? The most prominent and relevant cause of inflation would be when extra money enters the economy. As the general money supply increases, prices become more affordable, so to facilitate this increased purchasing capacity – prices naturally rise. Be warned, this description is put quiet simply. There are hundreds of factors involved in inflation, it’s why it remains such an issue even to modern economists.

Inflation, in most cases, is best kept to a low rate. High inflation rates can have catastrophic effects on the economy and trigger a domino effect in a specific markets – just take a look at the housing bubble. A good examples of it’s dangers would be post-war Germany in the 1920s; it was said that a the price of a loaf of bread could be one dollar in the morning, and inflate to 5 dollars in the evening. Such economic uncertainty is never a good thing, and that’s why so much effort is put into controlling and managing the money supply in the economy.