How Does Inflation Work?

Are you curious about how inflation works and why such an abstract idea forces your family to tighten your belt? We’ll discuss all you must know about inflation and how it impacts your daily life below.

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What Is Inflation?

Inflation refers to the rise of the average prices of goods and services in an economy.

The prices of most goods inflate during Christmas and New Year holidays, for example. They include Christmas trees, food, gift items, and others. It’s also why you feel like you spend more during Christmas.

What Causes Inflation?

Usually, inflation occurs when production costs also rise, such as wages or raw materials. Another reason behind inflation is the surge of demand for products and services and if consumers are willing to pay more.

For example, many employers also encourage their workers to remain at work and compensate their time at work with holiday pay. Another example is a growing demand for Christmas trees during the holiday season compared to other seasons.

How Does Inflation Affect the Economy?

Inflation is a massive and interconnected web. The inflation of one product or service will create a domino effect and cause other goods or services to inflate, too.

An excellent example is how the inflation of fuel affects food. First, the demand for fuel increases when more people travel home to visit their loved ones. The higher demand causes an increase in the cost of fuel.

As you know, food is an essential ingredient in holiday get-togethers. Food manufacturers must compensate for the increased fuel prices that they need to deliver their goods. Thus, they increase the price of food to make up for their increased costs of fuel.

Pros and Cons of Inflation

Inflation can affect the economy in positive ways:

  • It promotes economic growth
  • Producers and farmers can earn more from the increase in sales and profits
  • Traders, business people, and speculators also make more profits
  • It increases the collective income of the community
  • The total volume of internal trade also increases
  • The government revenue will increase from taxes

However, you should also be aware of these adverse effects of inflation on an economy:

  • Too much inflation can slow down or stop economic growth
  • Fixed-income earners lose more because their income doesn’t increase during inflation
  • At full employment, production cannot grow anymore
  • Vendors, business people, farmers, and producers will hoard commodities
  • The actual income of the people won’t increase proportionately

Too much and very little inflation can be harmful instead of helpful.


To summarize, inflation is the rise of the price of goods and services. It can be a concern and a good thing. When inflation of a product occurs, every industry connected to the product may also get affected, including end consumers.