Prices start increasing. Inflation exists because of Scarcity. The Consumer Price Index tracks this.
Natural/Controlled Inflation
2% inflation is natural Anything 1-3% is acceptable. Not a lot needs to be done by the Government Inflation is required for growth.
Causes
Prices get too expensive.
- Demand-Pull Inflation: When too much money in economy but not enough goods and services. Mid Stage Expansion
- Cost-Push Inflation: When production costs rise and the products cost more. Late Stage Expansion
Inflation Psychology
People know prices will rise, they buy more items. Supply is less, demand is less, this makes recovering from a recession even worse
Inflation Rate
Dependent on CPI