Inflation is when prices go up and the value of money goes down. It happens for a few main reasons:

Causes of Inflation:

1. Demand-Pull Inflation:

   • This happens when people want to buy more things than what is available.
   • For example, after the pandemic, lots of people wanted to buy things, so prices increased. In the UK, inflation hit 9.1% in August 2022.

2. Cost-Push Inflation:

   • This type of inflation happens when it costs more to make things. This could be due to higher wages or the price of materials going up.
   • For instance, in 2021 and 2022, energy prices rose a lot because of international conflicts, which added to inflation.

3. Built-in Inflation:

   • This occurs when businesses and workers expect prices to rise. As prices go up, workers ask for more money, causing a cycle of rising wages and prices.

How Inflation Affects Economic Growth:

• Moderate Inflation:

  • A small amount of inflation, around 2%, is usually a good sign for an economy. It encourages people to spend and invest because they think prices will keep climbing. This can help the economy grow.

• High Inflation Impact:

  • When inflation goes above 3-4%, it can make people worried. For example, in the UK, inflation went over 10% in 2022, which made people less confident and less willing to spend money.

• Real Interest Rates:

  • There is a link between the growth of the economy and inflation. For instance, during the 2010s, the UK had an average growth rate of 1.5% and an average inflation rate of about 1.7%.

In conclusion, inflation is a normal part of a growing economy. But if it gets too high, it can hurt stability and growth. It’s important for leaders to keep an eye on inflation to help the economy grow in a balanced way.