Economic phenomenon

Inflation is a sustained increase in the general price level of goods and services in an economy

Decrease in purchasing power

Consumer Price Index (CPI)

CPI tracks the price changes of a 'basket' of commonly purchased goods and services, indicating the rate of inflation

Inflation leads to a decrease in the purchasing power of money, meaning that a unit of currency buys fewer goods and services

Measurement and expression of inflation

Inflation is measured as a percentage increase or decrease in the CPI over a given period, such as an annual inflation rate of 3%

Erosion of purchasing power

Inflation reduces the value of income and savings, leading to a decrease in real purchasing power for consumers

Impact on consumer spending

Inflation can result in a decrease in overall consumer spending, negatively affecting businesses through reduced sales and potential profit margins

Influence on business operations

Inflation can increase the cost of raw materials and labor, requiring businesses to adjust prices and potentially creating a wage-price spiral

Effects on trade balance

Inflation can make exports less competitive and imports more expensive, potentially impacting a country's trade balance

Moderate inflation

Moderate inflation can indicate a growing economy and lead to increased consumer spending and higher demand for products and services, benefiting businesses

High inflation

High inflation can create uncertainty and discourage long-term investment, potentially leading to inefficient resource allocation and economic instability

Hyperinflation

Hyperinflation, an extreme and rapid form of inflation, can cause severe economic distress, shortages of goods, and a loss of confidence in the currency

Importance of managing inflation

Businesses must carefully manage pricing, wages, and investment strategies to mitigate the risks associated with high inflation

Moderate inflation as a sign of a healthy economy

Economists generally agree that a moderate level of inflation can encourage consumption and investment, leading to job creation and economic expansion

Importance of stable and predictable inflation

Volatile inflation can create uncertainty and hinder economic planning, highlighting the need for stable and predictable inflation

Central bank's role in maintaining price stability

Central banks, such as the Bank of England, aim to keep inflation within a desirable range by setting inflation targets and using monetary policy tools