Everything costs more. The coffee you buy each morning, the rent, the bus fare. When prices rise across the economy for a sustained period, that is inflation. It erodes purchasing power: the same paycheck buys less than it did a year ago. Central banks aim to keep inflation low and stable, usually around 2 percent per year.

Inflation comes from two main directions. Demand-pull inflation happens when spending outpaces production: too much money chasing too few goods. Cost-push inflation happens when production costs rise, like an oil price spike or a wage increase, and businesses pass those costs to consumers. In practice, both forces often operate at once.

Mild inflation is normal and even helpful. It greases the wheels of the labor market, allowing wages to adjust without nominal cuts. High inflation is destructive. It punishes savers, distorts investment, and forces central banks to raise interest rates sharply, which can trigger recessions. The 1970s stagflation, with high inflation and high unemployment, was a painful lesson in how hard inflation can be to control once it sets in.

Causes and effects

• Demand-pull: too much spending
• Cost-push: rising production costs
• Built-in: expectations of future inflation
• Winners: borrowers, asset holders
• Losers: savers, fixed-income retirees