What is really an inflation and how does it affect the economy and people?
Inflation is the rise in the general level of prices of goods and services in a given economy over a period of time. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
A variety of inflation measures are in use, designed to measure different sets of prices that affect different people. But the most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. It measures nominal consumer prices.
Inflation is not a good thing because it slows down economic growth. High Inflation cause many problems. It could hurt people on their fixed incomes by reducing their purchasing power. If inflation is higher in one country than in its trading partners’, and that country maintains fixed exchange rates, then the country’s exports will become more expensive abroad and it will tend toward a current-account deficit. High inflation also adds additional costs to long-term interest rates. These costs are to offset the risk associated with inflation. The additional costs make borrowing money less attractive. When people don’t buy things (when demand is down), then the supply of goods gets too high, production has to decrease, and unemployment increases, that is the time that recession hits.
