Inflation is the level at which the prices of goods and services rise in an economy. A low, sustainable level of inflation is crucial for the economic health of an economy.
Inflation reduces the purchasing power of the public, and so, if it rises too quickly, can lead to detrimental effects on an economy. In recent years, countries such as Venezuela and Zimbabwe have had crippling levels of inflation which have seriously hurt their national economies. When inflation reaches uncontrolled very high levels, it is termed hyperinflation.
However, low inflation can be equally as detrimental to economic health. One danger is that inflation may lurch into deflation – the decrease in prices of goods and services – which can bring untold problems to an economy. For example, Japan has, in recent years, been stuck in a deflationary cycle, keeping economic growth very low.
Central banks often target an inflation level, commonly close to, or under, 2% for optimum economic growth.