What is inflation?

Inflation refers to the general increase in the prices of goods and services in an economy over a period of time. This phenomenon typically indicates that the purchasing power of a currency is decreasing, meaning consumers can buy less with the same amount of money than they could before.

When inflation occurs, it affects various sectors of the economy, as businesses tend to adjust prices in response to increased costs of production or higher demand for their products. This gradual increase in prices can be measured by various indices, including the Consumer Price Index (CPI) and the Producer Price Index (PPI).

Understanding inflation is crucial as it influences monetary policy decisions made by central banks, such as interest rates. During periods of inflation, central banks may increase rates to cool down the economy, while low inflation may lead to rate cuts to stimulate spending.