Why Do Prices Rise?

Inflation is the general increase in prices and the fall in the purchasing power of money over time. It doesn't mean just one item got expensive; it means almost everything is getting more expensive at once. When inflation happens, your dollar buys less than it did yesterday. Economists measure this using the Consumer Price Index (CPI), which tracks the cost of a 'basket' of common goods like milk, gasoline, and rent. If the basket cost $100 last year and$105 this year, the inflation rate is $5\%$. While a little inflation (around $2\%$) is considered normal for a growing economy, rapid inflation can cause chaos.

Demand-pull inflation occurs when the demand for goods and services grows faster than the economy's ability to produce them. Think of it like a popular concert: if 10,000 people want tickets but there are only 5,000 seats, the price of those tickets will skyrocket. When consumers have lots of extra cash and feel confident about the future, they spend more. Because factories can't instantly build new machines or hire more workers to keep up, they raise their prices to manage the high demand. In short: the 'pull' comes from the buyers.

Cost-push inflation happens when the costs of production increase for businesses. If it becomes more expensive to make a product, companies will pass those costs on to you, the consumer, to maintain their profit margins. Common 'pushes' include rising wages for workers or an increase in the price of raw materials like oil or steel. For example, if the price of gasoline rises, it costs more to ship bread to the grocery store. To cover that extra shipping cost, the bakery raises the price of the bread. Here, the 'push' comes from the sellers' side.

Inflation doesn't affect everyone equally. The biggest 'losers' are people on fixed incomes, such as retirees who receive a set amount of money every month. If their check is $2,000 but prices double, they can only buy half as much as before. People with large savings in cash also lose value. On the flip side, **borrowers** can sometimes 'win.' If you borrowed$1,000 ten years ago and inflation makes $1,000 worth much less today, you are essentially paying back the loan with 'cheaper' dollars than the ones you originally received.