What is Inflation?

Inflation is the rise in the general price level of goods and services in an economy over a certain period. Simply put: with the same money, you can buy less than before.

How does inflation work?

Imagine a loaf of bread costs $2 today. With 3% annual inflation, that same loaf would cost $2.06 next year. After five years, it would cost $2.32. Your money hasn't changed, but prices have risen - your purchasing power has declined.

How is inflation measured?

Inflation is measured via the Consumer Price Index (CPI). Statistical agencies collect monthly prices of a large number of products and services that households use. This "basket" contains:

  • Food and beverages
  • Clothing
  • Housing (rent, energy)
  • Transport
  • Communication
  • Recreation and culture
  • Education
  • Restaurants and hotels

What causes inflation?

Inflation can have different causes:

Demand inflation

When there's more demand for products than can be produced, prices rise. This often happens in economically good times when people spend more.

Cost inflation

When production costs rise (for example, higher wage costs or more expensive raw materials), companies raise their prices to remain profitable.

Monetary inflation

When the money supply in the economy increases faster than production, this can lead to inflation. This is the result of monetary policy by central banks.

Is inflation always bad?

Not necessarily. Moderate inflation (around 2% per year, the ECB's target) is considered healthy. It stimulates economic growth and investment. Too low inflation or deflation (price decline) can hinder economic growth. Too high inflation erodes purchasing power too quickly and creates uncertainty.

What can you do about inflation?

As an individual consumer, your options are limited, but you can:

  • Have your salary indexed to inflation
  • Invest in assets that retain value (stocks, real estate)
  • Save at banks with competitive interest rates
  • Be conscious of your spending and save where possible

Calculate the effect yourself

With our inflation calculator, you can precisely calculate what inflation means for your purchasing power. Also check the current inflation figures for your country.