Inflation facts for kids
Inflation happens when the prices of most things around you start to go up. This means your money buys less than it used to. For example, a loaf of bread or a haircut might cost more money than before. The opposite of inflation is deflation, when prices generally go down.
Experts called economists regularly measure inflation. They do this to understand how well an economy is doing. When inflation happens, you need more money to buy the same amount of goods or services. Or, the same amount of money will get you less. Economists use a "customer basket" of common items to measure how much prices change. Inflation can have both good and bad effects.
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What Causes Inflation?
When there is too much money in an economy, its value can drop. Most economists believe that a rapid increase in the amount of money available leads to higher prices over time. However, they sometimes disagree on what causes prices to rise quickly in the short term.
Demand-Pull Inflation
Imagine lots of people want to buy something, but there isn't enough of it. This is like "too much money chasing too few goods." If everyone wants to buy a new video game, and only a few are made, the price will go up. This often happens in economies that are growing very fast.
When people want to buy more goods than companies can make, prices tend to rise. Companies might increase prices to manage how many products are sold.
Cost-Push Inflation
Cost-push inflation happens when the cost of making goods goes up for companies. To still make a profit, companies have to raise their selling prices. These higher costs can include things like:
- Higher wages for workers.
- More taxes paid to the government.
- Increased costs for raw materials from other countries.
What Are the Problems with Inflation?
Most people agree that too much inflation is a bad thing. Inflation affects different people in different ways. The impact also depends on whether people expect inflation or not. If people expect prices to rise (anticipated inflation), they can prepare for it. For example, banks might change their interest rates. Workers might ask for higher pay in their contracts.
Problems usually happen when inflation is unexpected:
- Lenders and Borrowers: If you lend money, you lose out if inflation is higher than you expected. The money you get back is worth less. People who borrow money benefit because they pay back less valuable money.
- Uncertainty: When prices are unpredictable, businesses and people are less likely to spend money. This can slow down the economy in the long run.
- Fixed Incomes: People with a set income, like retirees, find their money buys less. This lowers their standard of living.
- Menu Costs: Businesses have to spend time and money changing price lists, labels, and menus. This is called "menu costs."
- Competition: If prices rise faster in one country than in others, that country's products become more expensive for other countries to buy. This makes them less competitive.
- Interest Rates: Interest rates can go up because banks expect inflation.
Images for kids
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Price inflation (CPI year-on-year) in the United States from 1914 to 2018.
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US Consumer Price Index (CPI) from 1969 to 2019. Inflation is the increase in this index.
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Inflation and the growth of money supply (M2).
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Two 20 krona gold coins from the Scandinavian Monetary Union.
See also
In Spanish: Inflación para niños
