What is Inflation?
Inflation is the term used inthe rate at which the price of a representative basket of goods is increasing. Some inflation is good, and central banks attempt to achieve a consistently inflation level of around 2%. However, if inflation becomes too high then purchasing power is reduced and consumer spending is reduced.
The typical response to undesirable inflation levels by central banks is to adjust interest rates; raise them to avoid high inflation to promote saving and reduce spending or lower them to encourage spending and lending.