The COVID-19 pandemic has pushed inflation higher, with the Consumer Price Index (CPI) climbing to a post-pandemic peak in June 2022. However, many analysts expect inflation to decline over the long term.
Inflation occurs when prices rise faster than income, reducing the purchasing power of individuals and eroding the value of assets like cash. It can be damaging for people on fixed incomes, especially retirees, whose savings may not grow enough to offset rising prices. Moreover, it can lead to economic slowdowns because companies may delay investments in production or projects due to increased costs.
Understanding what causes inflation is an important part of assessing its impact on your financial situation. Inflation is a result of a variety of factors, including the cost of raw materials, increase in taxes or decrease in productivity. These factors can be exacerbated by a number of geopolitical events, such as natural disasters or wars, which lead to supply shortages and price increases for imported goods.
Ultimately, when prices rise faster than wages, individuals lose purchasing power and the economy suffers. This is why governments and central banks work to keep the rate of inflation low. They do so by adjusting interest rates and by increasing or decreasing the money supply. The goal is to stabilize the economy and promote sustainable growth. But inflation can be difficult to control because some price changes, such as those affecting traded commodities, happen rapidly and are hard to change.