Inflation is the rate at which prices rise over a period of time, and can be measured using price indexes. Inflation usually happens when demand exceeds supply, and consumers are willing to pay more for a good or service than it would otherwise be. This is known as demand-pull inflation. Companies can also induce inflation by raising prices on products that are popular with consumers, such as oil and food, or on essential services like utilities. This is called supply-push inflation.
Many economists believe that the COVID-19 pandemic caused a surge in inflation, as global shortages reduced the supply of essential goods and prices rose faster than wages. They predicted that the inflation surge would be temporary, once supply shortages were resolved and consumers regained confidence in the availability of important goods.
Prices for some goods change daily and can be adjusted to match market supply and demand, but other prices are more “sticky,” meaning that they require a longer time to adjust. Unevenly rising prices harm shoppers, especially those on fixed incomes, eroding their purchasing power over time. This harm is the biggest reason why governments often seek to control inflation, by increasing interest rates (a contractionary monetary policy) or through fiscal measures like taxes that increase relative costs for borrowers and owners of assets.
Regardless of the cause, inflation can be harmful for society as a whole because it disrupts economic growth. It makes it harder for businesses to hire workers and expand operations, and stifles consumer spending by raising the cost of goods and services. It can also reduce the purchasing power of savers, who lose out on the real value of their savings.