Interesting facts about inflation and what causes it

State-run monetary policy, that is, the central bank's policy, is the primary cause of inflation

by Sead Dedovic
Interesting facts about inflation and what causes it

In the midst of all the headlines bombarding us with inflation these days and the amount of uncertainty and fear accompanying it, we decided to address it head-on. The current economic situation does not seem to be favorable, nor is it likely to improve in the future, so what can we do about it? As a matter of fact, let's start from the beginning.

Inflation - what is it and how does it work?
Inflation simply refers to a decline in money's value. Wealth is said to be killed silently by her. Our childhood memories tell us that chewing gum, candies, and chocolates were immeasurably cheaper than they are today.

Price increases are not caused by greedy profit-seeking companies, but rather by inflation. Despite the fact that production techniques are constantly improving, we still have consumer goods (eg clothes, food, plastic products, etc.) that cannot be produced more efficiently because they have been on the market for quite some time.

Transport costs play a major role in their final price. Fuel has become increasingly expensive in recent years. Increasing inflation can be attributed to these products categories. The rise in fuel or food prices is not a cause, but an effect.

How does inflation occur?

State-run monetary policy, that is, the central bank's policy, is the primary cause of inflation. An inflationary situation can be controlled by adjusting interest rates and controlling money entering the system.

The long-term goal of most central banks is to maintain inflation at around two percent per year. What is the point of doing that? The economy benefits from mild inflation. Let's pretend we live in a society where cash appreciates over time (i.e.

a deflationary one). By doing this, people would save more, because that money will be worth more tomorrow, rather than spend more on products and services. Consequently, the company's income would decrease, which would lead to layoffs.

Nobody wants to live in such a scenario. The economy is simply propelled by inflation. We are more likely to invest or consume cash today if we know its value decreases over time. There is a benefit for the overall economy in both cases.