Inflation

Inflation refers to a rise in price of goods and services in an economy that has the effect of reducing purchasing power. But because inflation invariably accompanies growing economies, it is not always considered to be a negative. In principle, the incidence of inflation encourages consumers to consume today to avoid higher prices tomorrow. Too fast a rise in inflation can be damaging, however. As such, one of the core aims of central bank monetary policy is to tame the rate of inflation through monetary policy, including raising interest rates to dampen demand and slow consumption. Inflation occurs either when constant supply fails to keep up with rising demand, or when constant demand is met by falling supply.