Inflation Explained: Why Prices Keep Shocking You at the Store!

Have you ever experienced that moment when you're craving a mouthwatering Snickers candy bar, only to be surprised by a sudden increase in its price since your last indulgence? It's a relatable situation that many of us encounter. But have you paused to ponder why this price hike occurs?

If so, you’re in the perfect place to learn about inflation! Inflation is the persistent rise in the prices of goods and services over time.

Now, you might be wondering, what causes this evil villain to increase the value of my favorite candy?

One major reason is when the demand for goods and services exceeds the supply. In this case, businesses raise prices to balance demand with what is available, leading to higher prices.

Another cause is rising cost of production—such as increases in the price of raw materials, labor, or energy—which force companies to pass those costs onto consumers in the form of higher prices.

Finally, inflation can also happen when central banks increase the money supply. If more money circulates in the economy than the goods and services available, it reduces the value of money, making prices rise rapidly.

If prices can rise at different speeds, does that mean that there are different types of inflation? Correct!

The most common is demand-pull inflation. For instance, imagine there’s a new video game priced at $15 when it first comes out. Initially, it doesn’t get much attention, but over a few weeks, it becomes hugely popular. When you go to the store to buy it, you’re shocked to find the price has risen to $18. This happens because demand has exceeded beyond the available supply, and sellers raise prices to capitalize on the increased demand!

The second common type is cost-push inflation. Using the same video game example, imagine the company decides to upgrade the game’s quality by using better graphics and improved packaging. These improvements increase production costs, and since no business can sell at a loss, these higher costs are passed on to consumers, resulting in higher prices.

Next time you reach out for the Snickers bar and see the price increase, remember that there are various complex factors at play that contribute to these changes. From raw material costs to market trends and consumer behavior, pricing decisions are carefully considered by companies to ensure sustainable business operations while meeting customer expectations.

In our next article, we’ll explore the degrees of inflation, which type of inflation is actually considered ideal (yes, there is one!), and which is the most harmful. Stay tuned!

Written by Tehreem Ali

Edited by Riya Kalapurakkal