Inflation is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
- Inflation is measured by the Consumer Price Index (CPI). The CPI is a measure of the average change over time in the prices paid by consumers for a basket of goods and services. The U.S. Bureau of Labor Statistics publishes the CPI on a monthly basis.
- Inflation can have both positive and negative effects on the economy. A moderate level of inflation can be beneficial because it allows for increased economic growth and can help reduce unemployment. However, high levels of inflation can be detrimental, as it can lead to decreased purchasing power and uncertainty in the economy.
- Central banks use monetary policy to control inflation. Central banks, such as the Federal Reserve in the United States, use tools such as setting interest rates and buying or selling government bonds to influence the money supply and, in turn, control inflation.
- Inflation expectations play a role in economic decision making. If individuals and businesses expect inflation to be high in the future, they may be less likely to make long-term investments or enter into long-term contracts. This can lead to decreased economic growth.
- The goal of most central banks is to maintain a low and stable rate of inflation. In the United States, the Federal Reserve has a target inflation rate of 2% per year. This is considered a healthy rate of inflation that allows for economic growth without leading to harmful levels of price increases.
In conclusion, inflation is an important economic concept that measures the rate of price increases in the economy. Central banks use monetary policy to control inflation and maintain a healthy level of price increases that allows for economic growth. Understanding inflation can help individuals and businesses make informed economic decisions.