Inflation explained simply

Inflation is a significant economic indicator that is directly related to the cost of living, economic growth and wealth of a certain country against other countries that are using other currencies. Inflation can be explained by some clarifications that will help anyone understand the phenomenon better, even without a proper financial background.

Inflation can be explained by starting with a definition of the term. Inflation is a concept that defines a general increase in prices of goods and services resulting in a more or less significant decline in the purchasing power. Unlike the rising cost of living, inflation affects the entire economy of a country. The most important effect of inflation is that consumers may purchase fewer goods than before for the same amount of money. The only incomes that are not affected by inflation are social pensions, which are indexed to the inflation in order for the purchasing power to remain the same.

Impacts on the economy

The inflation rate is an indicator that measures what can be achieved in terms of goods or services with a specific amount of money. Inflation affects all prices and it is considered to be dangerous when it affects the economic growth and power of purchase. In the majority of cases, inflation has a negative impact on the economy of a country. Inflation can lead to a loss of confidence in the national currency, loss of competitiveness and in some situations can even be the cause of currency depreciation on the international markets. For this reasons, central banks are responsible for preventing inflation.

Monetary inflation is explained as an increase in the money supply by the government. This means that more money is printed by the government, a solution that in the long run results in price inflation. This phenomenon occurs because the currency loses its purchasing power as the money supply increases.

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