You’ve probably noticed that things cost more than they used to. A bag of rice, a bus fare, a haircut — the prices are higher than they were a year ago. That general rise in prices is what economists call inflation.

The basic definition

Inflation is the rate at which the general level of prices rises over time. When inflation is happening, each unit of currency buys fewer goods and services. Your money is worth less than it was.

What causes inflation

Three main causes operate simultaneously. Demand-pull inflation happens when people have more money to spend and bid up prices. Cost-push inflation happens when the cost of production rises and producers pass it on. Monetary inflation happens when more money chases the same amount of goods.

Inflation is not one thing. It is the sum of many pressures, and treating it as if it had a single cause leads to policies that fix part of the problem while making other parts worse.

Why it matters for you

Inflation erodes savings. If your money earns 5% interest but inflation runs at 10%, you are effectively losing 5% of your purchasing power each year. This is why financial advisers recommend holding assets that keep pace with inflation — though which assets depends on your context and risk tolerance.