What is inflation? Explained in 3 steps

If your grocery receipt is longer than it was last year, you're not alone. There's a name for it: inflation. In this article, we explain inflation in three steps, without the jargon.

1. Inflation is a general rise in prices

One product getting more expensive isn't inflation. Inflation is the rise over time in the general price level of goods and services, from bread to rent.

In Turkey, TÜİK (the Turkish Statistical Institute) measures this every month with the CPI (Consumer Price Index). "Yearly inflation of 30%" means an average shopping basket costs about 30% more than it did a year ago.

2. Why do prices rise?

In short: when the money and demand in an economy grow faster than the goods and services produced, prices go up. There are a few common reasons:

• Rising demand: When people want to spend more, sellers can raise prices.
• Rising costs: When energy, raw materials or exchange rates go up, producers may pass this on to prices.
• Expectations: If everyone thinks prices will rise, that expectation alone can push prices higher.

3. Inflation quietly erodes your savings

The least noticed effect of inflation is on purchasing power. The amount of money sitting on the sidelines doesn't change, but what you can buy with it shrinks.

A simple calculation: with yearly inflation at 30%, 10,000 TL left idle will have the purchasing power of about 7,700 TL in today's money a year later (10,000 / 1.30).

That's why the first question to ask when putting your savings to work is: Is the return staying above inflation? Every option comes with different risks; you should consider which might suit you based on your risk profile and time horizon.

What's next?

Understanding inflation is the first step to understanding why money needs to be "put to work". The first unit of Finside Patika, your learn-to-invest path, starts exactly here: The Story of Money and Money's Superpowers.