Inflation describes the general increase in the price level within an economy and the resulting loss in the value of money.
Simplified, this means that the purchasing power of money decreases. The population can therefore buy less for the same amount of money. Inflation is thus also an important indicator of the health of an economy. It is important to note that we only speak of inflation when the average price of a variety of goods rises. If, for example, bread becomes more expensive for a short time, this is not yet inflation.
How inflation arises
Inflation can have a variety of causes. Here are the two most important:
First, a lack of supply or too much demand for a necessary good, such as petrol, electricity or grain, can increase inflation. Since electricity or food cannot simply be dispensed with, the population willy-nilly has to pay the price. Thus, less money flows into other areas of the economy, such as luxury goods or tourism, because the population simply can no longer afford them.
The increase in the general money supply can also be a reason for inflation. This happens when the national bank or central bank excessively increases the money supply without it being offset by a corresponding increase in production or income. The best example of such a drastic devaluation of money was seen in Germany shortly after the First World War.
How is inflation calculated?
Normally, inflation is measured using a virtual basket of goods. The basket represents a variety of goods and services purchased by the average household, such as food, transportation and medical costs.
To calculate inflation, prices from the basket are evaluated at regular intervals and compared with previous periods. Based on the price difference, the percentage difference can be calculated.
Here is an example
Let us assume that the basket of goods has a price of CHF 100 in January 2022 and CHF 104 in January 2023. The inflation rate is therefore 4%. This means that the general price level in January 2023 has increased by 4% compared to January 2022.
However, it should be mentioned that most countries aim for an inflation rate of around 2% per year, as this value indicates healthy economic growth.
