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What is inflation, and how does it affect the economy?

Inflation is a measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly.

When prices rise, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power of money. A chief measure of price inflation is the inflation rate, the annualised percentage change in a general price index (normally the consumer price index) over time. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. When prices are falling, each unit of currency buys more goods and services than before, resulting in an increase in purchasing power.

Inflation can have a number of negative effects on the economy. For one, it erodes the purchasing power of money, meaning that the same amount of money will buy fewer goods and services in the future. This can lead to a decrease in consumer spending, which can, in turn, lead to a decline in economic activity. Inflation can also create uncertainty and unpredictability, which can make it difficult for businesses to plan for the future and make investment decisions.

Overall, inflation is a measure of the rate at which the general level of prices for goods and services is rising, and it can have negative effects on the economy. Central banks attempt to maintain low and stable inflation to keep the economy running smoothly.

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