What is inflation?

Economic inflation is known as the generalized increase in the prices of goods, products and services existing in the market in a given period of time. In other words, inflation gives way to a decrease in the purchasing power of the currency, that is, a loss of its real value. One way to measure inflation is to use the "consumer price index" (CPI), thanks to which the percentage of the prices of a set of products (known as "family basket") that form the basis of the survey of average spending and the budget of typical consumers is calculated.

The inverse phenomenon to inflation is thedeflation, a phenomenon that occurs when the prices of goods, products and services decline continuously and widely. There is a tendency to think that deflation is dangerous for economía of a country since, by decreasing prices, companies do not earn enough money and may end up disappearing, thus increasing unemployment rates. However, the higher the inflation, the greater the costs that the country's economy will suffer, being the loss of purchasing power of money its most important consequence.

Among the causes of inflation, we can consider three as the most important:

  • Increase in demand for a good or service
  • Increase in production costs
  • Structural inflation (due to social causes)

The most commonly used indicators to calculate inflation are:

  • Consumer Price Index (CPI)
  • Underlying CPI
  • GDP deflator

En Calcuworld They have a series of very practical tools to calculate these indicators, including the CPI and inflation calculator that will help you calculate the variation between two dates.

There is a relationship between inflation and interest rates, if interest rates are not on par with inflation, no one will invest in bonds issued by the government or corporations. When bond interest rates are high, it is often reflected in a high inflation rate that will eat up the profit.

visit our accounting glossary for more information on all economic and accounting terms.

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