High inflation can lead to lower purchasing power, as prices tend to grow before wages, and those with savings or living on a fixed income see their buying power erode. Hyperinflation, the extreme example of this phenomenon, can lead to total economic collapse as the currency loses value so quickly that it essentially becomes worthless. Negative inflation, commonly called deflation, is also a problem because the falling prices mean that companies and financers are forced to save money, leading to decreased wages, layoffs, unemployment, and delayed investments.
Ways of measuring inflationInflation is often measured by the consumer price index (CPI), which measures the total price of a fixed basket of goods and services over time. This represents a measure of costs that consumers face, calculated to represent how much changing prices affects consumers. However, those more interested in business look to the producer price index (PPI) or other indexes, which represent the costs of firms and may influence financial markets differently. Because each sector experiences inflation in a different way, many analysts also look at the CPI in their selected industries. Similarly, different people have different economic interests. Older generations, more interested in the changing price level due to their tendency to live on a fixed pension, tend to consider inflation to be a greater concern than younger people.
Coronavirus and the war in UkraineThe aftermath of the Coronavirus pandemic was accompanied by high inflation levels, starting in the latter half of 2021. As production and transport was brought to a halt in 2020, it took time to bring production to a normal level as demands increased. Moreover, China's continued no-covid strategy, with lockdown of complete cities such as Shanghai, resulted in continuing production disruptions.
Furthermore, the Russian invasion in Ukraine in February 2022 further spurred global inflation, affecting especially certain food products such as wheat and corn, as well as energy sources such as natural gas, which can be observed in the chart above. The rising inflation and leaping energy bills mean that people increasingly struggle with making ends meet. Even though the inflation pressure seems to have eased somewhat as of March 2023, inflation rates are expected to be high through 2023.