What is inflation, why is it important and what does it affect?

Crypto News
12 September 2023

How are prices rising? Why has bread gone up tenfold and will continue to do so?

What is inflation in simple terms?

The inflation rate is an indicator of the growth of the general level of prices for goods and services, which occurs in parallel with an increase in the amount of money in circulation. Now, let's put it in simple terms: inflation is the process of money depreciation that occurs when more money enters the market. This is due to the fact that the population has more resources, i.e., increased purchasing power (demand), while the supply remains at the same level - this leads to higher prices, because demand begins to exceed supply. Price increases affect producers, who are forced to raise prices as well.

How is it measured?

Inflation is measured in different ways, the most common being the use of the consumer price index, which takes into account average changes in prices for goods and services.

What does inflation affect?

  1. On consumers. The purchasing power decreases. For the same amount of $, you can buy fewer goods and services. This, in turn, negatively affects the domestic economic situation in the country.
  2. On producers. High inflation has a negative impact on production, which is forced to raise prices due to higher prices for products.
  3. Investment climate. High inflation scares investors and reduces their attractiveness, because the inflation rate can significantly reduce the return on investment. Real profit can even become negative.
  4. Lending and debt. Inflation can reduce the real value of debt. The real price of borrowing may be lower in the future. Inflation has an impact on the Fed and its monetary policy. High inflation can lead to higher interest rates, and we will talk more about this today.

Who controls inflation and how?

The Central Bank and the Federal Reserve are responsible for controlling this issue, which aims to maintain inflation at an acceptable level. This is realized through interaction with various instruments, for example, by changing interest rates and working with the country's money supply.

In turn, rate control affects the operation of the entire economic machine and the country's overall monetary policy. Raising rates reduces money supply and consumer demand, which reduces inflation. There are other instruments of influence, for example, the Fed can buy bonds to support banks and increase lending, which also affects economic indicators.

Impact on the global economy

From the above, it is already clear that inflation affects the US economy, thereby affecting global financial markets. This is mostly due to the fact that the dollar is the world's national currency and a major creditor.

The situation now

In 2020, inflation in the United States was 1.2%. In 2021, inflation broke a 40-year record, rising to 9.1%, which contributed to tighter monetary policy.

The Fed is currently seeking to reduce and maintain inflation at around 2%. J. Powell has repeatedly assured that the Fed will continue its policy until it gets the desired result. According to the forecasts of reputable banks, we will get this level of inflation no earlier than the end of 2024, which means that it is too early to talk about lowering rates.

A lot of attention is focused on tomorrow's CPI (consumer price index) publication, as the indicator will directly influence the Fed meeting and the interest rate decision on September 20. +-90% probability of a halt in rate hikes is the current market expectation.


The inflation rate is closely related to the Fed's activities and the country's monetary policy. The indicator is important not only domestically but also for all global financial markets. Inflation is a part of economic life and has an impact even on you and me.

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