Inflation

1. Definition

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. * It acts as an "Invisible Tax" on your savings.

2. Main Causes

2.1. Demand-Pull Inflation

• Occurs when demand for goods and services exceeds production capacity.
• "Too much money chasing too few goods." (e.g., Post-pandemic spending spree).

2.2. Cost-Push Inflation

• Occurs when production costs increase prices.
• Driven by rising wages or raw material prices (like Oil or Wheat shock).

3. Impact

• Erosion of Purchasing Power: \$100 today buys fewer groceries than it did last year.
• Wealth Transfer: It transfers wealth from savers (cash holders) to borrowers (debtors), as the real value of debt decreases over time.

4. How to Fight It

Central banks (like the Federal Reserve) usually raise interest rates to combat high inflation. * Higher rates make borrowing expensive and saving attractive, which cools down the economy and slows price growth.