Inflation is a continuing rise in the general level of prices.
Inflation results in our money having less purchasing power – our money is worth less.
Deflation is the opposite, a decrease in the level of prices.
Inflation results in:
- higher interest rates (people want to see a gap between the inflation rate and their saving rate or it is not worth saving money)
- increased spending
- reduced saving
- decline in international competitiveness
- bracket creep (income falling into higher tax rates) as wages rise
- reduced standard of living
Aggregate demand and supply diagrams can be used to explain the cause of inflation – demand pull and cost push.
To learn more about this, as a starting point, take this Macroeconomics – Inflation Tutorial Course Macroeconomics Inflation Tutorial Course