Inflation

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Financial Terms and Glossary

Inflation

Inflation is the rate at which the general level of prices for goods and services in an economy increases over time, reducing the purchasing power of money. It is typically measured by price indices such as the Consumer Price Index (CPI).Moderate inflation is considered normal in growing economies, but high inflation can erode savings, distort pricing mechanisms, and lead to economic instability. Central banks use monetary policies, such as adjusting interest rates, to control inflation levels.

Example

If inflation is running at 3% per year, a basket of goods that cost $100 this year would cost $103 the following year.

Key points

• Refers to the general rise in prices over time, reducing purchasing power.

• Measured by indices like the Consumer Price Index (CPI).

• Controlled by central banks through monetary policies like interest rate adjustments.

Quick Answers to Curious Questions

What causes inflation?

Inflation can be caused by demand-pull factors (increased demand), cost-push factors (rising production costs), or excessive money supply.

How does inflation affect consumers?

Inflation erodes purchasing power, making goods and services more expensive over time, which can impact consumer spending and saving.

How do central banks control inflation?

Central banks control inflation by adjusting interest rates and using monetary policies to regulate the money supply and influence demand in the economy.