What Is Inflation And When Can It Be A Problem?

Inflation refers to the sustained increase in the price of goods and services. Broadly, it is quantified by measuring the change in prices for a basket of goods and services – which is known as the all-familiar Consumer Price Index (“CPI”).

Inflation occurs when economic activity is increasing and there is a mismatch in demand and supply, thereby resulting in price increases. This can be driven from the supply side (known as “cost-push”) or from the demand side (known as “demand-pull”). Left unchecked, inflation can be detrimental as it erodes the purchasing power of money and diminishes the real returns of invested assets, resulting in a host of negative flow-on impacts to both consumers and governments alike.

However, inflation is not inherently always an issue. When inflation is increasing at reasonable levels, most central bank’s target an annual inflation range between 2-3% p.a, it signals a growing economy which is beneficial for all market participants. It is only when inflation rises too far above these “healthy” levels that the erosion of the consumer’s purchasing power (and its corresponding effects) outweighs the benefits flowing from the economic expansion.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.