Inflation is when the prices of goods and services go up over time. This means that money buys less than it used to. Let's learn about different types of inflation.
Demand-pull inflation happens when people want to buy more goods and services than what is available. When demand is higher than supply, prices go up.
Example: Imagine there are only 10 toys in a store, but 20 kids want to buy them. The store owner might raise the price because many kids want the toys.
Cost-push inflation occurs when the cost to make goods and services goes up. This can happen because of higher prices for raw materials or wages. When it costs more to make things, companies raise their prices.
Example: If the price of wood goes up, furniture makers will spend more to make chairs and tables. They will then raise the prices of chairs and tables to cover the higher costs.
Built-in inflation happens when workers expect prices to go up, so they ask for higher wages. Companies then raise prices to pay for the higher wages, leading to more inflation.
Example: If workers expect the cost of living to go up, they might ask for a raise. If they get higher wages, the company might increase the prices of their products to cover the higher wages.
Hyperinflation is when prices go up very quickly and by a lot. This usually happens when a country prints too much money, making the money worth less.
Example: In some countries, people needed a wheelbarrow full of money just to buy a loaf of bread because the money had lost so much value.
Stagflation is when inflation happens at the same time as high unemployment and slow economic growth. This is a rare and difficult situation for a country.
Example: If a country has high prices but many people are out of work and the economy is not growing, it is experiencing stagflation.
Deflation is the opposite of inflation. It happens when prices go down over time. While this might sound good, it can be bad for the economy because people might wait to buy things, hoping prices will drop more.
Example: If people expect the price of a new phone to drop, they might wait to buy it. This can cause companies to sell fewer phones and make less money.
Reflation is when the government tries to increase prices to combat deflation. They might do this by lowering interest rates or increasing the money supply.
Example: If prices are falling too much, the government might lower interest rates so people borrow and spend more money, helping prices to go up again.
Disinflation is when the rate of inflation slows down. Prices are still going up, but not as quickly as before.
Example: If prices were rising by 5% last year but only by 3% this year, that is disinflation.
