Inflation means that there is a continuous increase in the price of goods and services throughout an economy.
If one business decides to increase the price of their product one day this is not necessarily inflation, it could just be an attempt to make more profit.
On the contrary, inflation occurs where the general price level of most goods and services is going up. The two main reasons for this increase in prices is because the cost of producing is also increasing (cost-push inflation) and due to extra demand in the economy (demand-pull inflation).
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Key terms:
Demand-pull inflation – inflation caused by excess demand in the economy.
Cost-push inflation – inflation caused by increasing costs of production for producers of goods and services.
Purchasing power – the amount of goods or services that a certain amount of money can buy.