What is inflation ?

  If you've been paying attention to the news recently, you might have heard a little word called inflation. Inflation is essentially the devaluing of a currency. While many people have a connotation that inflation is very bad, inflation on its own is actually a necessary part of a functioning economy. 

Inflation is the reason things seem to get more expensive overtime, both because goods get more expensive and a dollar goes less far to purchase things. Generally, inflation is expected as a percentage decline in value, and generally the Federal Reserve in the US targets inflation to be at roughly 2% per year, but a variety of factors cause inflation to swing up and down. Defined simply, inflation is the rate at which a value of a currency falls and the price of goods rises. People that own goods or assets generally like inflation because these goods go up in value with inflation. But people holding cash don't like inflation because it decreases the cashes value. Inflation is caused primarily by an increase in the supply of money if a good has one value with one total supply of money in order for the ratio of value to total supply of money to stay the same or how generally expensive or cheap something is. When the overall supply of money goes up, so too does the value of that good. Some inflation is caused by a demand pull effect or an increase in demand for goods, usually from more money without an increase in supply of those goods. When there's more demand but the same or decreasing supply, the price has to go up. There's also built in inflation, which occurs when a population expects inflation. Which they then demand more pay for the same work, resulting in people having more money, resulting in the price of goods going up, resulting in more inflation. This final type of inflation can spiral out of control without a centralized approach on how to handle it. Inflation is often viewed as good because it promotes investment. Would you expect your money to be less valuable in the future? You get out and spend it now on investments that will grow to counteract the value decrease. However Inflation does generally hurt people without assets in low amounts of cash to invest. If these groups of people don't see wage increases, then overtime the same salary numerically actually becomes worth less and less. This is why countries raise minimum wages and why companies will often process annual raises. The last thing to realize about inflation is that it can generally be controlled by adjusting financial levers at the central banks of a country by adjusting interest rates. The central bank  can temper or accelerate interest in investment by association influencing inflation. Inflation can get out of control though, when consumer sentiment and outside factors fly off the handle. In these situations we see hyperinflation where a currency is rapidly devalued and economies can collapse if this occurs. But for the most part, inflation is a carefully controlled metric and to be expected in modern economies.