The Social Science Research Network reports that 927 academic papers were published in 2008 with the word “Inflation” in their title. That being said, the exact cause of inflation is considered one of the world’s biggest and most common mysteries to many people.

A very simplistic answer is that inflation occurs when too much money is chasing too few goods and services. Central banks control the money supply and would like to see steady, but low inflation. To inject money into the economy, the central banks loan money to banks and collect interest on it called “Seigniorage” or buy assets such as credit default swaps. To reduce the money supply, the central banks sell government bonds. If there is too much money or not enough things to buy, inflation typically, but not always, results.

The actual rate of inflation is a function of all of the millions of people buying, selling, and producing in an economy. It is also a product of people’s expectations. If workers expect high inflation, they will demand raises. Their raises will make the goods they produce more expensive. Higher priced goods are one cause of inflation.

Negative inflation is called deflation. In a deflationary environment, money actually becomes more valuable, which, in turn, causes people to hang on to it. If too many people hang on to too much money, stock markets crash and mass unemployment and depressions ensue. Governments will do most anything to prevent deflation. However, no matter how fast the money supply grows, if people do not want to spend that money, inflation will not happen.