Inflation Explained.

Inflation measures the increase in cost of living. Basically it

refers to the annual percentage increase in the general price
level.
Inflation means that the value of money decreases.
Basically, if prices increase it means that £10 will buy less
goods than previously.
Hyper inflation occurs when prices increase at an
exponential rate of say over 1000%. When this occurs it
creates great instability in the economy. In extreme cases it
can lead to a barter economy where people stop using
money but trade goods. Examples include Germany in the
1920s and Hungary 1946. Recent examples include Croatia

Inflation is measured using the CPI - Consumer Price Index.

However, in the past the government used the RPI and
RPIX. Some people argue RPI is more accurate because it
included housing costs and taxes excluded from the CPI.
The government has an inflation target of CPI 2% +/- 1%. In
the past 10 years, the UK has been relatively very
successful in maintaining low inflation.

High inflation is considered harmful to the economy because

it creates uncertainty amongst firms and consumers. This
leads to lower investment and economic growth.
High inflation is associated with unsustainable economic
growth. This leads to the boom and bust situation of the late
1980s.
In economics, inflation is a rise in the general level of prices
of goods and services in an economy over a period of time.
The term "inflation" once referred to increases in the money
supply (monetary inflation); however, economic debates
about the relationship between money supply and price
levels have led to its primary use today in describing price
inflation. Inflation can also be described as a decline in the
real value of money—a loss of purchasing power in the
medium of exchange which is also the monetary unit of
account. When the general price level rises, each unit of
currency buys fewer goods and services. A chief measure of
price inflation is the inflation rate, which is the percentage
change in a price index over time.

Inflation can cause adverse effects on the economy. For

example, uncertainty about future inflation may discourage
investment and saving. High inflation may lead to shortages
of goods if consumers begin hoarding out of concern that
prices will increase in the future.

Economists generally agree that high rates of inflation and

hyperinflation are caused by an excessive growth of the
money supply. Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate
inflation may be attributed to fluctuations in real demand for
goods and services, or changes in available supplies such
as during scarcities, as well as to growth in the money
supply. However, the consensus view is that a long
sustained period of inflation is caused by money supply
growing faster than the rate of economic growth.

Today, most economists favor a low steady rate of inflation.

Low (as opposed to zero or negative) inflation may reduce
the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reducing
the risk that a liquidity trap prevents monetary policy from
stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary
authorities. Generally, these monetary authorities are the
central banks that control the size of the money supply
through the setting of interest rates, through open market
operations, and through the setting of banking reserve
requirements.