Inflation Definition – What is Inflation? | CFI LB


Inflation is generally quoted in percentages and is the measure of the average price at which a select basket of goods and services in a country rises over a specific period.


Inflation demonstrates the rise in prices in a country and therefore the reduced purchasing power of the country’s currency over that period. The opposite of inflation is known as deflation, which is where prices are decreasing over the specified period.


The three major types of inflation are:


Built-in inflation


Built-in inflation is when future expectations become factored into pricing, for example, a workforce will demand higher wages to compensate for an increased cost of living, and therefore, the cost of goods or services provided by the workers’ employers increase so that the employer’s profit margins are protected.


Demand-pull inflation


Demand-pull inflation occurs when the market demand for goods and services is greater than the ability to produce them, resulting in a demand-supply gap that is capitalized on by either the original supplier to the market or third-parties seeking to profit by re-introducing the volume they have procured back into the market at inflated prices.


Cost-push inflation


Cost-push inflation is often exhibited when the cost of production increases. Good forecasting and financial planning would expect, and allow for, certain occurrences, and therefore many factors in cost-push inflation become built-in inflation.


However, in the food industry, for example, an unexpected drought in a country key to the production of the world’s wheat supply, resulting in an unexpected shortage in supply to the market would likely lead to demand-pull inflation in the price of wheat. This price rise increases the cost of production of any product containing wheat and would likely result in a rise in the price of the final product to consumers.


Controlling inflation


Central banks monitor their country’s inflation rate closely and try to control the inflation rate by utilizing various monetary policies. These policies will aim to control the money supply within the country’s economy and therefore control the rate of inflation in an attempt to hit the central bank’s long-term inflation rate target.


Central banks will aim to have a stable inflation rate as it will allow businesses in the economy to better prepare for the future as they will know what to expect in regards to many economic factors such as labour and production costs and likely future selling prices received for their products or services.


Key takeaways:


  • Inflation, in general terms, is the rate at which a basket of goods and services increases over time
  • There are three major types of inflation: built-in inflation, demand-supply inflation, and cost-push inflation
  • Central banks aim to keep their country’s inflation rate stable and on target as this helps businesses to plan, contributing to a stronger economy
  • Central banks use monetary policy in an attempt to control the inflation rate
CFI Financial Group is an award winning global financial markets provider with over 23 years of experience and regulated entities in several jurisdictions, focused on offering impeccable execution and trading conditions including very low spreads, professional services, dedicated support and powerful tools.
CFI Financial Group has regulated subsidiaries in
London • Larnaca • Beirut • Amman • Dubai • Port Louis
Credit Financier Invest - CFI LEBANON
BDL no. 40
Ellipse Center 3rd floor, Charles
Malek Avenue, Achrafieh

CFI provides execution-only services and does not provide any investment advice. To make an investment decision, you cannot rely on the content of this website, or on any information, opinion, report or other materials (“Information”) you receive from CFI, or its representatives. Such Information is general and does not consider your objectives and your financial situation, thus they shall not be considered in any way as an express or implied promise nor a guarantee of any profit or limit of loss. CFI shall not bear any liability in case you used or relied on such Information. Please ensure that you make your own research and seek independent advice if necessary.

Forex and CFDs are leveraged products that incur a high level of risk. A small adverse market movement may expose the client to lose the entire invested capital. The majority of retail client accounts lose money when trading in CFDs. Please be aware of trading risks and that you could sustain a loss exceeding your deposited funds, even if a stop loss is used.

CFI Lebanon is regulated by the Banque du Liban and the Capital Markets Authority

The Best Online Financial Trading Services, Middle East, 2020
Entrepreneur Magazine

Please publish modules in offcanvas position.