What is inflation in simple terms

inflation

The inflation describes the steady rise in the price level of an economy. The value of money goes down with inflation, and you can buy less for the same amount than you did before. The deflation means the opposite. So the monetary value increases.

Definition of inflation and deflation - what is it?

Under inflation one understands the increased amount of money in circulation and the associated rising price level. The prices of all goods are rising continuously and you can buy one euro less than before. One euro is therefore worth less.

The deflation is the opposite of inflation. Here the prices for goods and services fall in the long term and the monetary value increases. Deflation, like inflation, has a negative impact on the economy, due to the fact that companies have to respond to falling prices by laying off workers, lowering wages, reducing production and making less overall profit.

Because consumers are also reacting to deflation and with less consumption because they are constantly hoping for a lower price.
Further consequences are that banks have issued fewer loans and the value of debts increases.

Causes and origins of inflation

Inflation can develop for various reasons. For one thing, inflation can occur if the central bank wants to increase liquidity in the market. As more money can then be spent, the demand increases. This in turn leads to a rise in prices because the money supply increases faster than the goods available. The demand is greater than the supply.

Another possible cause are increases in production costs, such as wage increases or rising raw material prices. As companies still want to make a profit, they raise their prices, which lowers the value of money.

advantages

On the one hand, central banks can also exert an influence on inflation by raising the key interest rate. As a result, the granting of loans becomes less attractive and money becomes scarcer at the same time. The scarcity in turn leads to rising monetary value and low inflation.

On the other hand, politics is able to control inflation, for example by changing or setting taxes or price and salary agreements.

As long as it does not get too high, inflation is often wanted. This is the case, for example, when prices are to be steered in a different direction or government debt needs to be reduced.

disadvantage

Inflation is a major disadvantage, especially for savers, as savings investments are also subject to inflation.

But high inflation also means many disadvantages for employees, because the purchasing power of their wages decreases and the wages are usually not adjusted directly to inflation. There are also disadvantages for creditors. Because the real value of the loan diminishes when the money loses value.

Measurement

In Germany, as in many other countries, inflation is measured with the help of a so-called shopping basket. This shopping cart contains all goods and services that are consumed by the average German household within a year. Often the prices change from year to year, so that one can compare the prices of the shopping cart for one year with the previous year and calculate the inflation rate.

Types of inflation

The types of inflation are differentiated on the one hand according to the recognizability of the price increase and on the other hand according to the speed.

The recognizability of the price increase:

  1. Open inflation: The price increase and the devaluation are recognizable for everyone.
  2. Covert inflation: The prices remain constant, but the quality of the goods deteriorates, as a result of which the actual monetary value decreases.
  3. Dammed inflation: The price level is kept artificially stable by the state through maximum prices.

The speed of inflation

  1. Creeping inflation: The price increase is small and happens almost unnoticed, but constantly.
  2. Trotting inflation: This means a mean price increase.
  3. Galloping inflation: The price level rises significantly, which is a threat to the economy.
  4. Hyperinflation: This is an extreme case due to a very high price increase.