If every price in an economy doubled overnight, and every wage doubled too, would anyone be worse off? The instinct is to say no. The reason inflation matters, and the reason central banks fight it so hard, is that this never happens evenly. Some prices move first, some wages lag, some savings are eroded, and the losses fall on people who did nothing wrong.
Inflation
A sustained increase in the general price level of an economy over a period of time.
Both 'sustained' and 'general' carry marks. A one-off jump in the price of one good is neither. Candidates who write only 'prices going up' typically score one mark out of two.
Inflation has two broad causes. Demand-pull inflation occurs when total demand in the economy grows faster than the economy's ability to supply, so buyers bid prices up. Cost-push inflation occurs when the costs of production rise, through wages, imported raw materials or a weaker exchange rate, and firms pass those costs on. The distinction matters because the appropriate policy response differs: demand-pull responds to tighter demand management, whereas cost-push does not and may worsen under it.
A country's currency depreciates sharply, raising the price of imported oil and components. This is most likely to cause:
The consequences fall unevenly. Savers lose if interest rates sit below the inflation rate, while borrowers gain as the real value of their debt shrinks. Those on fixed incomes lose most, because their income does not adjust. Firms face uncertainty that discourages investment. And if domestic inflation exceeds that of trading partners, exports become less price competitive.