What is inflation?

What causes inflation? Check out this video to learn about two of the most commonly discussed factors.

Video transcript

Understanding inflation

When people refer to inflation, they’re generally speaking about an increase in the prices of goods and services over time. Inflation can be influenced by a variety of factors. In general, two factors are the most commonly discussed. 

Increase in the demand for goods and services

When the demand for goods and services rises faster than the supply, prices go up. 

For example, if people in a city are making more money and there is only a limited amount of places to live, rent in that city will increase. There is more demand for places to live than there is supply. 

Increase in the cost of production

If factors related to production costs increase, in order for companies to maintain their profit margin, they raise their prices. Things like natural disasters, a scarcity of resources or a rise in the cost of labour will all affect this.

Suppose there is a global shortage in the oil market. If you buy oranges from the store, the price of oranges will go up. This is beacuse it’s now become more expensive for companies to transport the oranges.

Is inflation beneficial?

Inflation is a normal part of the economy. Although high inflation can be problematic, a moderate inflation rate can be beneficial for long-term economic growth. In times of high inflation, it’s important to remember that the economy is always changing. Think long-term and stick to your financial plan.