Inflation is the rate at which the price of goods and services increases. As a result of inflation, the purchasing power (value) of money decreases over time. Inflation affects the prices of everything around us.

Generally speaking, inflation can be caused by a number of factors. The recent surge in inflation has been driven, at least in part, by supply chain issues, pent-up consumer demand and economic stimulus from the pandemic.

» Learn more: When will inflation go down?

What is inflation?

There are many types of inflation, characterized by either a root cause or the rate of increase:

• Cost-push. A common cause of inflation is when the costs of producing goods and services increase and push prices higher. This can happen when prices of raw materials or labor costs rise.

• Demand-pull. Another cause of inflation is when the demand for goods and services outstrips what can be produced at the time, making prices go up.

• Deflation. The opposite of inflation — a negative inflation rate or a drop in prices of goods and services.

• Disinflation. A falling rate of inflation or slowdown in the rise in prices of goods and services.

• Reflation. A way to curb deflation, when a government purposely stimulates the economy by increasing the money supply or government spending — such as the COVID stimulus payments. Reflation can also happen when a government lowers interest rates.

• Creeping. Low or mild inflation with prices rising less than 3% a year.

• Walking (trotting). Prices rise moderately, but the annual inflation rate stays in the single digits.

• Running (galloping). Prices increase significantly into the double digits, above 10% a year.

• Hyperinflation. Extraordinary inflation spiraling out of control, over 1,000% a year.

• Stagflation. High inflation even during an economic downturn.