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Matters Simplified.
Basics Explained: What is inflation 
Here's what you need to know about one of the most familiar business terms.
Inflation is one of the most familiar terms used in the business and finance world. You would have heard central bankers talk about achieving economic stability by altering inflation. Here’s what you must know about inflation.
What is inflation?
Inflation is the rate of increase in prices of goods and services over a given period of time that could affect the cost of living in a country. If inflation increases, it could reduce your purchasing power and discourage investment and savings. Hence, it’s very important to maintain steady rates of inflation in a country.
What creates inflation?
Supply and demand of money play a very important role in maintaining inflation rates. A situation of high inflation occurs when the monetary policy is very relaxed. If prices of goods and services increase,purchasing power falls and the value of currency diminishes. If the supply of the goods and services are affected in the market, it can disrupt production costs. This can further lead to a sharp rise in food and fuel costs, which are traded from one country to another.
However, on the other hand, excess demand for goods and services can affect the economy’s production capacity which might hurt the value of resources. Hence, it is important that policymakers draft appropriate measures to find the right balance between demand and supply in order to maintain inflation.
How do policy makers deal with inflation?
Central bankers are responsible for holding the economy together by maintaining stable inflation rates. To impose monetary discipline in the country is extremely difficult but policymakers have the power to influence the country in terms of sustaining inflation rates that best suits the economy. If there is instability in prices, policymakers usually influence the demand by raising or lowering interest rates. And when inflation is driven by any global circumstances, bankers take on the task of influencing the exchange rates of the economy.
How to measure inflation?
The cost of living generally depends on the prices of goods and services that fit a family budget. A price change for a single good or service does not determine inflation. In order to measure overall inflation, the price change of a large basket of representative goods and services is taken into consideration. The combined price is the sum of the weighted prices of items in the basket. A weighted price is calculated by multiplying the unit price of an item by the number of that item the average consumer purchases.