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Definition – What does Inflation mean?

Inflation is an economic condition where the prices for goods and services in an country see a prolonged and general rise. Inflation may also be expressed as a reduction in the purchasing power of each unit of currency compared to its historical value.

ForexTerms explains Inflation

Inflation isn’t a mysterious force. It can usually be tied to the monetary policies of a nation, particularly monetary easing. If the money supply is increased faster than a nations economy grows, the value of each additional unit of money is worth fractionally less. Since money isn’t something that expires, this loss in value occurs to all units of money equally.

Increases in the money supply often spur people and businesses to invest because, when inflation is eating 2-4% of the value of every dollar and a savings account only pays 1%, there is less incentive to save. For this reason, many countries set a target inflation rate that they believe will offer the best amount of growth while trying to minimize the chances of too much inflation.

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