How does inflation work and what causes it?

Types:

• Demand-pull: Too much money chasing too few goods (e.g., stimulus spending)
• Cost-push: Rising production costs (wages, raw materials) passed to consumers
• Built-in: Workers expect prices to rise → demand higher wages → businesses raise prices → cycle continues

Measured by: Consumer Price Index (CPI) — tracks the cost of a basket of common goods over time.

Effects: Savings lose value, borrowers benefit (repay loans with "cheaper" money), fixed-income earners suffer. Central banks target ~2% annual inflation as healthy for economic growth.