Inflation

Inflation is the sustained increase in the general price level of goods and services in an economy over time, resulting in a decrease in the purchasing power of money. It’s typically measured by the Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE) index. For example, if inflation is 3% annually, something that costs $100 today will cost $103 next year. Central banks typically target inflation around 2% as this level promotes economic growth without causing instability. Causes of inflation include demand-pull (excess demand), cost-push (rising production costs), and monetary expansion (increased money supply). Moderate inflation encourages spending and investment, while high inflation erodes savings and creates economic uncertainty. Hyperinflation, like in Zimbabwe in 2008 when inflation reached 231 million percent, can destroy an economy. Central banks use monetary policy tools like interest rates to control inflation.