How does inflation affect prices?

Increased production costs, such as higher wages or raw material prices, can lead to cost-push inflationto maintain profit margins.

Services exceeds supply, demand-pull inflation occurs. Businesses may respond by increasing prices due to high demand.

Central banks may adjust interest rates to control inflation. Higher interest rates can lead to increased borrowing costs for businesses.

Expectations: Anticipating future inflation, businesses may preemptively raise prices, contributing to a self-fulfilling cycle.

Businesses face costs associated with changing prices, known as menu costs. They may delay adjustments, contributing to lingering inflation effects.