Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of a currency. It is typically expressed as a percentage over a specific period, usually annually. When inflation occurs, each unit of currency buys fewer goods and services than it did previously, indicating a reduction in the currency’s value.
Inflation can be caused by various factors, including an increase in demand for goods and services (demand-pull inflation), rising production costs (cost-push inflation), or expansionary monetary policies that increase the money supply. Central banks often monitor inflation trends closely, as high inflation can erode savings and disrupt economic stability.
Governments and financial institutions use various measures to control inflation, such as adjusting interest rates, influencing money supply, and implementing fiscal policies. Maintaining moderate inflation is generally considered essential for economic growth, but hyperinflation, which is an extremely high and typically accelerating inflation, can lead to severe economic problems. Conversely, deflation, a reduction in the general price level, can lead to decreased economic activity and increased unemployment.
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