Inflation is the rate at which prices across an economy rise over time, reducing the purchasing power of money. If inflation is 5% per year, a basket of goods that cost £100 this year will cost £105 next year. Your money buys less.
Inflation has several causes, which economists typically group into three categories. Demand-pull inflation occurs when the economy is growing fast and demand for goods and services outstrips supply. Too much money chasing too few goods pushes prices up. This is often described as "an overheating economy."
Cost-push inflation happens when the costs of producing goods rise — higher wages, more expensive raw materials, or supply chain disruptions — and producers pass these costs on to consumers through higher prices. The oil price shocks of the 1970s triggered this kind of inflation across the developed world. The supply chain disruptions of 2021-2022 following the COVID-19 pandemic are another example.
Built-in inflation (also called wage-price spiral) occurs when workers expect prices to rise and demand higher wages in response. Higher wages increase business costs, which push prices up further, which leads workers to demand even higher wages. Once this cycle starts, it is self-reinforcing and difficult to break.
Monetary inflation — the "too much money chasing too few goods" explanation — links inflation to the growth in money supply. When central banks significantly expand the money supply, more money competes for the same quantity of goods, driving prices up. This was central to the hyperinflation episodes of Weimar Germany and Zimbabwe.
Mild inflation (around 2%) is actually desirable and is the explicit target of most central banks. It encourages spending (holding cash costs you 2% per year in real terms), discourages hoarding, and allows relative prices to adjust more smoothly. The problem starts when inflation becomes too high, too sustained, or too unpredictable.