Answered from cited sources · retrieved September 20, 2026
how does inflation work
Inflation is the sustained increase in the general price level of goods and services in an economy, which decreases the purchasing power of money over time.
Inflation is the rate at which the general level of prices for goods and services rises over time, which reduces the purchasing power of currency. It is typically measured by tracking a representative basket of items and calculating the percentage change in their cost over a period, usually a year. Inflation is driven by three primary factors: demand-pull (when demand outpaces supply), cost-push (when production costs rise or supply is disrupted), and inflation expectations (when people's beliefs about future price increases influence their current wage and pricing decisions). Central banks often use interest rates to manage these pressures and maintain price stability.
- Demand-Pull Inflation. Demand-pull inflation occurs when the demand for goods and services exceeds the economy's ability to produce them, often driven by rising incomes or lower borrowing costs.
- Cost-Push Inflation. Cost-push inflation happens when production costs rise—such as higher energy prices or supply chain disruptions—forcing producers to increase prices.
- Inflation Expectations. If businesses and workers expect future inflation, they may raise prices or demand higher wages, creating a self-fulfilling cycle that can sustain or increase inflation.
- Measurement. Inflation is measured by tracking the cost of a representative basket of goods and services over time and comparing it to previous periods.
Sources
- What is Inflation?clevelandfed.org
- FRB: What is inflation and how does the Federal Reserve measure it?federalreserve.gov
- The Fed - What is inflation, and how does ...federalreserve.gov · published August 22, 2025
- Inflation Explained: Your Guide to Inflation Basicsclevelandfed.org
- What is inflation?ecb.europa.eu · published January 22, 2025
- Inflation: Prices on the Riseimf.org
- What is inflation? | Bank of Englandbankofengland.co.uk
- What Causes Inflation?clevelandfed.org
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