What Is Inflation and Why It Matters?

Inflation is a general increase in the prices of goods and services over time. This can be caused by various factors, such as an increase in the money supply, an increase in production costs, or a decrease in the value of money. Inflation can have both positive and negative effects on an economy.

Why is inflation needed?

On the positive side, inflation can stimulate economic growth by encouraging people to spend money rather than saving it. When prices are expected to rise, consumers are more likely to make purchases now rather than waiting for prices to go up even further in the future. This increased spending can lead to more economic activity and growth.

Disadvantages of inflation?

On the negative side, inflation can erode the purchasing power of money. When prices go up, the same amount of money buys fewer goods and services, which means that people have less purchasing power. This can lead to a decrease in the standard of living for some people, especially those on fixed incomes.

Stability & uncertainty 

Inflation can also create uncertainty and instability. When prices are rising, it can be difficult for businesses to predict how much they will need to charge for their products, which can make it harder for them to plan for the future. This can lead to reduced investment and economic growth.

How do Central Banks deal with inflation?

To combat inflation, central banks can use a variety of tools, such as raising interest rates or decreasing the money supply. These measures can help to reduce demand and slow the rate of price increases.