What is Inflation?

Inflation is the term used in economics to describe the 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.

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