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Inflation – what it is and why should everyone pay attention

This article briefly describes inflation and its characteristics. It also looks at the importance of central banks and inflation expectations.

A consistent rise in the average price of goods and services is referred to as inflation. The Consumer Price Index (CPI), which is normally calculated on a monthly basis by the Bureau of Labor Statistics (BLS), reports it as an annual percentage rise. There are also other known inflation measures, such as the Personal Consumption Expenditures Price Index (PCE), Producer Price Index (PPI), or the Harmonised Index of Consumer Prices (HICP).

Purchasing power declines as inflation increases. That’s not all, though. Fixed asset values are impacted, businesses change the prices they charge for products and services, financial markets react, and investment portfolio composition are impacted as well.

Why does inflation occur?

There might be several causes of inflation. They include fiscal policy, a rise in demand for goods and services (demand-pull inflation), and an increase in production costs (cost-push inflation). Cost-push inflation occurs when supply decreases due to increasing costs while demand for products and services stays the same.

Consumer confidence is strong during demand-pull inflation, which may cause a decrease in supply and an increase in prices. By decreasing interest rates, boosting expenditure, and infusing more money into the economy, central banks may also broaden their fiscal policies.

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