Inflation is the rate at which prices across an economy increase over time. When inflation is at 5%, something that cost €100 last year costs €105 this year. This seems simple, but its effects ripple through every aspect of economic life.
Why does inflation happen?
Economists identify several causes. Demand-pull inflation occurs when too much money chases too few goods — when an economy is booming and people are spending freely, prices rise. Cost-push inflation occurs when the cost of producing goods rises — an oil price spike, a supply chain disruption, or a bad harvest — and producers pass those costs to consumers. Monetary inflation can occur when a central bank creates too much money, diluting the value of existing currency.
How it is measured
Most countries track inflation through a Consumer Price Index (CPI): a basket of typical goods and services whose prices are monitored monthly. The basket includes food, housing, transport, healthcare, clothing and entertainment. The weighting of each category reflects average household spending patterns.
Who is hurt and who benefits
Inflation redistributes wealth. Those on fixed incomes — pensioners, people with fixed-rate savings — lose purchasing power. Those with variable-rate mortgages see their debt eroded in real terms. Businesses with pricing power can protect margins. Workers who successfully negotiate wage increases above inflation break even. Understanding which category you are in is the first step to managing the effects on your personal finances.
