ELI5: What is inflation?

Imagine you have $1 and you can buy a candy bar with it.

Now, inflation is like this:

• Suddenly, the candy bar costs $2 instead of $1. Your $1 can't buy the same candy bar anymore.

Why does this happen?

One reason is if there's too much money around. Imagine everyone suddenly gets twice as much money. If there are still the same number of candy bars, the candy bar shop can charge more because people have more money to spend.

Another reason is if it costs more to make things. If the ingredients to make the candy bar become more expensive (like the sugar or chocolate), the candy bar shop has to charge more to make a profit.

So, inflation basically means your money doesn't buy as much as it used to. It's like your $1 is shrinking!

Is inflation always bad? Not necessarily. A little bit of inflation is normal and can be good for the economy. It encourages people to spend and invest their money instead of just saving it because the value of money decreases over time.

But too much inflation, called hyperinflation, is bad because it makes it hard for people to afford things, and businesses don't know how much to charge.

In simple terms:

• Inflation = Prices go up
• Your money buys less.