Inflation & Deflation: Causes and Effects

Inflation comes up everywhere — in the news, at work, at the next table in a café. Here's what it is, where it comes from, how it affects you personally, and whether its opposite, deflation, is as good as it sounds on paper (spoiler: not at all).

What is inflation

Inflation is a sustained rise in the general level of prices for goods and services. Over time the same money buys less: its purchasing power falls.

Two words in that definition matter. Sustained means it's not a one-week jump in the price of a single product, but a movement that lasts for months. General means it's not one thing getting more expensive, but most goods and services on average. If only cucumbers went up, that's not inflation yet.

Low and predictable inflation is considered normal. Many central banks explicitly target it: the US Federal Reserve aims for 2% a year, for example, and the Bank of Russia for 4%.

How inflation is measured

Inflation is usually measured with the consumer price index (CPI) — the change in the cost of a consumer basket. That's a set of goods and services an average household buys, from bread and fuel to haircuts and bus fares. It's calculated in two steps:

1. The statistics office decides what goes into the basket and how much weight each item gets. In Russia, for example, Rosstat calculates the CPI, and its basket has 558 items in 2026.
2. Every month, prices for these items are collected across the country and compared with the previous period.

Put simply: last year a basket cost $1,000, this year the same basket costs $1,100. Prices rose 10% — annual inflation is 10%.

How your personal inflation differs from the official rate

Official inflation shows the picture for the country as a whole. But the average basket can be very different from yours. If you rent, drive a car or raise a child, your spending looks different from the "average household". So the prices of what you actually buy may rise noticeably faster than the official figure — or slower.

That's your personal inflation. It's hard to calculate exactly, and Moneon doesn't calculate it. But you can see which of your expenses are growing if you track spending by category. Compare the same category — groceries, transport, utilities — over several months or with the same month a year ago. This compares spending, not prices: the total in a category grows both with prices and with buying more or buying different things. It hints at prices only if your habits have barely changed.

In Moneon, the Summary shows your expenses by category for the selected period, and the arrows next to the period name take you back through previous months. Premium reports show a category over a longer stretch and compare periods on a chart.

Causes of inflation

Prices rise when demand in the economy outpaces what it can produce, or when production costs go up. Here's where that usually comes from.

• Cheap credit. The central bank sets its policy rate, and rates on loans and deposits follow it. The lower the rate, the cheaper the loans, the more people and businesses spend — and the harder demand pushes on prices. (In Russia people used to talk about the "refinancing rate", but since 2016 it has been equal to the key rate.)
• Rising costs. Oil, electricity, raw materials or shipping get more expensive, or a harvest fails — and producers pass the costs on in their prices.
• Weak competition. When a market has few players, it's easier for them to raise prices.
• Government budget deficit. If the government spends more than it takes in, the extra spending can push demand ahead of output. How much this moves prices depends on how the gap is covered — new money or borrowing — and on the state of the economy.
• Military and emergency spending. The government spends a lot, but that doesn't put more goods and services on shelves for people.
• A weaker national currency. When it depreciates, imported goods and materials get more expensive, and so do local goods made with imported components.
• Inflation expectations. If people and businesses expect prices to rise, they build that into wages and prices and stock up in advance — and the expectations come true.

How to protect your money from inflation

There's no universal recipe, and specific returns go out of date fast, so there are no numbers here — only principles.

Compare returns with inflation. Cash under the mattress loses value at the rate of inflation. If the rate on a deposit or savings account is below inflation, your money still loses purchasing power, just more slowly. Check whether deposits are insured in your country and up to what amount.

Bonds. A bond is a loan: you lend money to a government or a company, and they pay you interest. The risk depends on the borrower, the term and the conditions: bonds from reliable borrowers usually move in price more calmly than stocks, but you can still lose money — if the borrower doesn't pay or the bond's price falls when rates rise.

Stocks. Buying shares makes you a co-owner of a company. Over the long run they may outpace inflation, but they can also fall sharply: returns aren't guaranteed and the risks are high.

Managed funds and advisers. You can hand your money to professional managers. You pay a fee for that, and the result isn't guaranteed — read the terms carefully.

Watch your spending. This is what you control directly: when you know which categories are getting more expensive fastest, it's easier to decide where to slow down.

What is deflation

Deflation is the opposite of inflation: a sustained fall in the general price level. The purchasing power of money grows.

Don't confuse it with seasonal price drops. Prices of some goods, such as vegetables in summer, can fall for a month or two, and sometimes that even nudges the overall index down for a month. But that's not deflation if prices still rise over the year.

At first glance it looks great — the same money buys more. In practice, prolonged deflation is more harmful to the economy than moderate inflation.

The dangers of deflation

When prices are falling and everyone expects them to keep falling, people put off big purchases: why buy today if it will be cheaper tomorrow? Demand shrinks, and one thing leads to another.

• Businesses lose revenue. Goods sell worse and production is cut.
• Household incomes fall. Businesses cut wages and lay people off, which pushes demand down even further.
• Debts get heavier. Prices and incomes fall, but the loan amount stays the same — it gets harder to repay.
• The economy slows down. Banks lend more cautiously, and businesses invest less.

Counteracting deflation

The central bank cuts its policy rate so that loans become cheaper and people and businesses start spending and investing again. If the rate is already near zero, the central bank can buy government bonds and other assets to put more money into the economy. The government, for its part, can cut taxes or increase spending.

The goal of all these measures is to bring prices back to moderate growth and demand back to normal.

Let's recap

Inflation is a sustained rise in the general price level. Low and predictable inflation is normal, and many central banks target it explicitly.

Official inflation is measured with an average basket; your personal inflation depends on what you spend on.

Inflation has many causes, and most are beyond your control. They're worth understanding, but what you can influence is your own finances: compare what your savings earn with inflation, and know which of your expenses grow fastest.

Prolonged deflation is more dangerous than moderate inflation, but it's rare.