What is inflation?

Inflation is the rate at which the overall level of prices for goods and services rises, eroding the value of money. When inflation is high, the same amount of cash buys less than it did before. Economists measure it using indexes such as the Consumer Price Index, which tracks the changing cost of a typical basket of goods. Moderate inflation, often around 2 percent a year, is considered healthy for an economy, but rapid inflation can hurt savers and destabilise societies. Inflation can be caused by rising demand, higher production costs, or an increase in the money supply. Central banks, such as the Federal Reserve, try to control it mainly by raising or lowering interest rates. The opposite of inflation, falling prices, is called deflation.