Have you ever felt like your money isn’t stretching as far as it used to? If so, you may be experiencing inflation. This is a common part of the economy’s cycles and understanding what it is and why it happens can help you make smarter financial decisions.
Inflation occurs when overall demand broadly outpaces supply and prices rise. It’s one of the most common economic phenomena and is often caused by a mismatch between real demand and production, or a lack of productivity growth. It can also be caused by political policies (such as raising taxes or cutting government spending) or by events outside of a nation’s control, such as a natural disaster or global food shortage.
Consumers can feel the effects of inflation through rising food, utility and gas costs. This can cause household belt-tightening and pessimism about the economy. It can also be especially difficult for retirees and people on fixed incomes to make ends meet.
Companies can also be affected by inflation. This can be a result of price increases for inputs that are necessary for production, such as raw materials or oil. This type of inflation is referred to as cost push inflation. It can also be caused by a change in the value of currency, which is referred to as demand pull inflation.
Another way that inflation can affect consumers is through increasing home prices. This is due to the fact that it becomes more expensive to build a house when the cost of building materials rises.