Inflation is defined as the rise of the overall prices of goods and services over a certain period in time.

As the general level of prices climbs, the purchasing power for each unit of currency declines.

For example, if one U.S. dollar can buy two candy bars in 2000, and only one candy bar in 2020, you’ve just experienced inflation!

Most economists agree that inflation is caused primarily by the imbalanced growth of money supply with respect to the rate of economic expansion.

Other reasons include excessive demand for goods and services and decreased availability of supply during scarcities.

Inflation has good and bad effects depending on how people are affected.

For instance, high inflation is helpful to borrowers as it decreases the real value of money they pay to their lenders. Debt becomes cheaper.

Consumers, on the other hand, are obviously hurt by high inflation as it erodes their purchasing power.

In the forex market, the issue of inflation is very important because it is one of the primary factors central banks consider when determining interest rates.

Keeping inflation levels consistent and in check is the responsibility of a central bank, who will generally work towards an inflation target.

Inflation is usually measured using a consumer price index (CPI), which tracks the cost of a basket of consumer goods and services.

Changes in inflation can have a major impact on financial markets, as they affect purchasing power and can bring about change in a central bank’s monetary policy.