What is inflation and what causes it?
Short answer
Inflation is a sustained rise in the general price level, which means each unit of money buys less. It is usually measured by the change in a consumer price index over a year. The two main causes are demand-pull inflation, when total demand grows faster than the economy can produce, and cost-push inflation, when production costs such as wages, fuel or imports rise.
Step by step
- Define inflation as a sustained rise in the general price level.
- Explain demand-pull: too much spending chasing too few goods.
- Explain cost-push: firms pass higher costs on to consumers.
- Mention expectations: if people expect prices to rise, they ask for higher wages, which pushes prices up.
- Name the usual policy response: higher interest rates set by the central bank.
Worked example
Calculating an inflation rate
- Price index last year: 200
- Price index this year: 210
- Inflation = (210 − 200) ÷ 200 × 100 = 5%
Common mistakes
- Saying inflation means all prices rise. It is the general level; some prices may fall.
- Confusing a fall in inflation with falling prices. Prices are still rising, just more slowly.
- Ignoring who loses: savers and people on fixed incomes.
A one-to-one lesson with a tutor is the quickest way to fill the gaps before a test or exam. Your first lesson is free.
Find a Economics tutor