Skip to main content
Foundations

Inflation deep-dive

Pomegra Learn

Inflation deep-dive

Inflation occurs when the general level of prices for goods and services rises over time, reducing purchasing power. It can be caused by too much money chasing too few goods, rising input costs, or expectations that prices will continue rising. This chapter dives into how inflation forms, how it's measured, who experiences it differently, and what it does to savers, borrowers, businesses, and policymakers. Inflation is perhaps the most politically charged macroeconomic variable—it touches everyone's pocketbook and shapes political fortunes.

Why this matters​

Inflation is far more than an academic concern—it determines whether your savings gain or lose value, whether your wages keep up with living costs, and whether your mortgage debt becomes manageable or crushing. High inflation punishes savers and benefits borrowers; low inflation or deflation does the reverse. A retiree living off savings is devastated by unexpected inflation that erodes their purchasing power. A homeowner with a fixed-rate mortgage benefits from inflation that devalues their debt. Central banks spend enormous effort trying to target inflation around two percent—not zero, and not high. Understanding why they do this, and what happens when inflation spirals or becomes unexpectedly sticky, is essential for navigating modern economies and protecting your financial interests.

What you'll learn​

You'll learn the quantity theory of money: the idea that too much money relative to goods and services drives prices up. The equation of exchange—money supply times velocity equals price level times output—is simple yet powerful. You'll see how inflation is measured through consumer price indices, producer price indices, and other deflators—and why different measures tell different stories depending on what basket of goods you examine. Core inflation excludes volatile food and energy; headline inflation includes everything. This chapter covers wage inflation, asset inflation, and deflation. You'll discover how expectations matter: if people expect inflation, they demand higher wages, which creates inflation, which confirms expectations. This wage-price spiral is how inflation can become self-perpetuating. You'll finish by understanding the distributional effects—who wins and loses when prices rise.

How to read this chapter​

Begin with the sources of inflation: monetary expansion, supply shocks, cost-push, and expectations. Learn how inflation is measured and what different indices capture. Work through the channels by which inflation affects the economy: wage inflation, menu costs (the actual cost of changing prices), and asset price movements. The crucial concept is the Phillips curve—the historical relationship between unemployment and inflation—and why it has shifted over decades. End with the real-world effects: how high inflation distorts investment, how unexpected inflation transfers wealth from savers to borrowers, and how central banks try to prevent runaway inflation.

Articles in this chapter​