Inflation is the rate at which the prices for goods and services increase. It's one of the key measures of financial well-being because it affects what consumers can buy for their money. It's expressed as a percentage increase or decrease in prices over time. Inflation is the decline of purchasing power of a given currency over time. For example, if the inflation rate for the cost of a liter of gasoline is 2% a year, motorists need to spend 2% more at the pump than 12 months earlier. And if wages don't keep up with inflation, purchasing power and the standard of living falls.

Causes of Inflation

An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy . The mechanisms of how this drives inflation can be classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.

Pros and Cons of Inflation

Inflation can be construed as either a good or a bad thing, depending upon which side one takes, and how rapidly the change occurs. Individuals with tangible assets that are priced in currency, like property or stocked commodities, may like to see some inflation as that raises the price of their assets which they can sell at a higher rate. It can benefit borrowers. For example, anyone with a fixed-rate mortgage benefits from inflation, as it effectively reduces their debt. Governments might also benefit as high inflation eats away at the value of their debts. However, the buyers of such assets may not be happy with inflation, as they will be required to shell out more money. People holding assets denominated in currency, such as cash or bonds, may also not like inflation, as it erodes the real value of their holdings. For savers - including those planning for retirement - inflation cuts how far their money will go in the future. High and variable rates of inflation can impose major costs on an economy. Businesses, workers, and consumers must all account for the effects of generally rising prices in their buying, selling, and planning decisions. If inflation is higher than expected, it can also put companies off investing, if they're uncertain about future costs and demand.

How is inflation measured?

The Consumer Prices Index (CPI) is the most commonly quoted figure. The Formula for Measuring Inflation:

Percent Inflation Rate = (Final CPI Index Value/Initial CPI Value)*100

What is hyperinflation?

When prices of goods or services are out of control and rise very quickly, that's referred to as hyperinflation. It can happen if a government prints more money to pay for its spending. As there's a larger supply of money around, prices increase, and so the government prints more money.It creates a spiral that is extremely difficult to get out of.

The most countries' central banks have an inflation target of between 2% and 2.5%.

In the UK, the government has set the Bank of England an inflation target of 2%. The latest UK inflation figures we have show the rate rose to 1.5% in April, up from 0.7% the month before.

In Canada, Statistics Canada says the consumer price index in April was up 3.4 per cent compared with a year ago, when prices plunged due to the pandemic. Gasoline prices in April were up 62.5 per cent on a year-over-year basis, the largest annual increase Statistics Canada has on record (https://www.cbc.ca/news/business/inflation-statistics-canada-1.6032304?cmp=rss).

In U.S. the annual inflation rate for the United States is 4.2% for the 12 months ended April 2021 after rising 2.6% previously, according to U.S. Labor Department data published May 12 ( https://www.usinflationcalculator.com/inflation/current-inflation-rates/) .