Key Concepts Macro - Inflation (3/5)

• Inflation happens when the general level of prices for goods and services rises over time.
• Moderate inflation is normal and expected in growing economies.

-> Inflation reduces purchasing power (What $100 buys today may cost $105 next year)

Too much inflation (hyperinflation) or too little (deflation) can be dangerous.

• Central banks aim to keep inflation controlled, often targeting around 2% per year.
• Central banks can reduce the amount of money circulating in the economy.
• Governments can cut public spending or increase taxes to reduce overall demand in the economy.

Causes of inflation:

• Demand-pull (too much demand)
• Cost-push (rising production costs)

Causes of deflation:

• Demand loss (more saving, less spending)
• Production increase (production gets cheaper)

Inflation:

• Increase in the general prices of goods and services.
• Common in growing economies.

Deflation:

• Decrease in the general prices of goods and services.
• Often linked to recessions or financial crises.

Inflation erodes purchasing power, while deflation increases it — but both can destabilize the economy if left unchecked.

• Inflation/Deflation affects daily life — understanding it helps you make smarter spending, saving, and investment decisions.
• Inflation often happens when demand or costs rise, while deflation often results from weaker demand or very high efficiency.
• Inflation can’t always be avoided, but smart policies can keep it moderate and predictable — preventing serious economic damage.