The inflation rate is the percentage change in the prices of a standardized selection of goods and services (a basket of items) over a given period. The prices of this basket are determined through extensive consumption surveys conducted by statistical offices or similar institutions. The value of this basket is then compared with the price of the basket in the previous period to calculate the inflation rate. Various indices can measure inflation, and the Consumer Price Index is the most commonly used indicator.
Inflation is a complex phenomenon that can impact multiple areas of the economy, including people’s purchasing power and the interest rates on national debt. Keeping inflation in check is vital for economic stability. Inflation that is too high can lead to social unrest and make it difficult for businesses to plan for the future, causing investment to slow. This can also make a country’s currency less valuable, which is bad for international trade.
When inflation is low, it can encourage investments and wage growth, which can help a nation’s economy thrive. Inflation that is too high can discourage investment and cause people to hold onto their cash, reducing the overall spending in an economy. This can also make a country’s economy less competitive, since products may sell for X around the world but are sold in the local market for X*2 due to inflation. It can also discourage savings because the money in a bank will be worth less when it is withdrawn, making it harder for people to plan for the future.