"Inflation is overall or specific increase in cost of a good or service."Thank you, Mr. Dictionary.
Inflation is when your mom or dad complains about prices they have to pay nowadays compared to what they paid when they were a younger.
"I remember when a candy bar only cost a nickel." "I used to buy gas at that station for 15¢ a gallon." "When did milk get so expensive?" "You paid HOW much for your home?"
Inflation in America has been relatively steady. There have been some periods of high inflation, such as was seen in 70's, but on average inflation in US has been steady at about 3% for past 30 years. Some countries have experienced inflation above 1000% in a single year.
The 3% figure is also pretty close to average as you go further back in US history. So we will use 3% figure as we discuss effects of inflation.
A detailed analysis of cause of inflation is beyond scope of this short article, but we can mention some things that tend to cause inflation.
Increases in government taxes and fees can lead to inflation (especially when businesses are taxed). When cost of business goes up, product prices go up. When prices go up your income effectively goes down. Then you have to work harder or find a better job. Or hope that your employer will give you a raise.
Which then makes business costs go up and so prices go up and so on.
Also when your personal income taxes, property taxes, sales taxes, auto registration fees, etc. increase you are forced to live on less or hit boss up for a raise.
If you get your raise (and several of your co-workers also are given raises) cost of doing business has gone up. The business will then pass extra costs on to their customers - inflation.
Inflation can also be caused by scarcity. If there are only a 10,000 Beanie-Babies, "Tickle-Me-Elmos", "Chicken-Dance-Elmos", or what ever current toy-craze is, and there are 100,000 people that want one, price is going to go up.
If mad-cow disease causes cattle ranchers to destroy large portions of their herds and there is less beef on market, price of beef will go up.
If interest rates go up, inflation can also result. If it costs more to borrow money, cost of doing business has gone up and so will product and service prices.
For last 10 years inflation has been relatively low. It is my uneducated opinion that inflation has been minimal because people have relied on stock market boom of 90s to supply extra cash. Also many people have taken on additional debt rather than curtail their spending.
But people can only stand so much debt. Once you are maxed out on your ability to pay (you may never max out your credit limit as long as you keep paying on time), you will either have to reduce your lifestyle, beg for a raise or find a higher paying job.
I predict that once majority of middle-class America is saturated with debt, inflation will begin to rise or economy will stagnate for years until some of debt is paid down or people's homes appreciate so that they can borrow more money against them. (Yes, you will be getting further into debt, but at least you can buy that new boat.)
For most part, regular, steady inflation has little effect on our day-to-day living. Most people get a pay raise every year or every other year that either keeps pace with inflation or helps them move a bit ahead.
But when you are looking at long run and making long term plans, inflation can have a big impact.