Inflation is an economic concept referring to the pace at which the prices of goods and services increase over time.
A low, sustainable level of inflation is crucial for healthy economic growth, and therefore one of the main objectives of central banks’ monetary policy is to maintain inflation close to a 2% annual rate.
Inflation, however, reduces the purchasing power of the currency and so it may have very negative economic consequences if it rises too quickly.
In some cases, sharp declines in foreign exchange rates have led to soaring import prices and ultimately to ballooning inflation. Venezuela and Zimbabwe are two examples of how these dynamics can hurt national economies. In these cases, when inflation reaches uncontrolled, very high levels, it is termed hyperinflation.
On the other hand, low inflation can be equally detrimental to economic health. One danger is that inflation may lurch into deflation – a generalised decrease in prices of goods and services – which can bring untold problems to an economy. For example, Japan has been stuck in a deflationary cycle in recent years, keeping economic growth very low.