Inflation continues to surge across countries including the United States and the United Kingdom.
When you hear that inflation is on the rise and you see headlines with record-breaking increases, such as in Sri Lanka where inflation has peaked at 39%, it sounds dire. But percentages don't translate well into what this actually means for you.
There are many contributing factors that are used to determine the rate of inflation and different organizations, depending on the country, come up with the figure. At the time of writing, many countries around the world are experiencing their highest rates of inflation in decades.
But what does inflation actually mean, and how does it impact us?
Inflation, as a general term, is the diminishing purchasing power of a given currency over a period of time. It's a measure of the increased price of goods and services in an economy.
Inflation can be measured in months or years. When the price of goods increases and is sustained over a period of time, inflation then puts pressure on consumers and reduces their purchasing power.
When rates of inflation are high and sustained over time, this reduces the value of the money in our wallets and our bank accounts.
Inflation is a broad term used to measure the overall picture of price rises in an economy. For example, inflation can factor in the cost of essentials including electricity, gas, clothing, and food, as well as public transport, electronics, and "luxury" goods.
The takeaway is: The higher the inflation level, the less purchasing power your money has.
Economically, there are several major types of inflation that economies face. You can have demand-pull inflation caused by demand and economic growth that is going too fast; cost-push inflation when businesses are forced to increase their prices due to the higher price of raw goods and materials, and built-in inflation, prompted by workers who expect their wages to go up in line with the increased costs of goods and services.