What causes Inflation?

Many factors cause inflation, some of them are:

  • demand and supply of goods or services (the more a product is in demand, especially when supply stays unchanged, the more it costs. The same effect happens when the supply diminishes with the demand staying unchanged) 
  • money supply (the more money is available in the market, the less is its value and hence purchasing power)

Inflation is usually measured on a yearly or monthly basis and is expressed as a percentage. For example, when the inflation rate is 3%, this means that the prices will increase within a year by 3%. Potatoes that cost $1 per kg will cost $1.03 after a year.  

Inflation affect not only the prices of goods and services. When purchasing power of consumers decreases, the ones who work demand higher salaries. Many companies adjust their salaries on an annual basis to reflect inflation. However, some do not. What then happens is that consumers can afford less working as much as before.

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