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Inflation

What is inflation?

Inflation is the increasing price of goods and services over time, which reduces a currency’s purchasing power.

  • Inflation is the decrease of a currency’s purchasing power as the cost of goods and services increase.
  • It's influenced by several factors: changing costs of raw materials and production, demand for goods and services, or interest rates.

Consumers can’t purchase the same amount of goods and services with the same amount of money as they could in the past. For example, a chocolate bar in 2010 costs $1, and if we had $100, we could buy 100 chocolate bars. If the price of the chocolate bar increased to $1.25 in 2020, then with $100 we can now only purchase 75 chocolate bars. In 2020, we end up purchasing 25% fewer candy bars than we could in 2010. The U.S. dollar experienced an inflation rate of 25% because the purchasing power of the dollar decreased by 25%. Inflation is only recognized if the costs of goods and services increase throughout the entire economy.

Inflation is also influenced by several factors: changing costs of raw materials and production, demand for goods and services, or interest rates. All else equal, inflation increases if an economy’s aggregate supply decreases or aggregate demand increases.