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In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.<ref>See:

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When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.<ref>Why price stability?, Central Bank of Iceland, Accessed on September 11, 2008.</ref><ref>Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429. "The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes that the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements."</ref> A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.<ref name="Mankiw 2002 22–32">{{#invoke:Footnotes|harvard_citation_no_bracket}}</ref> The opposite of inflation is deflation.

Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.

Inflation also has positive effects:

  • Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This increase in spending and investment can benefit the economy. However it may also lead to sub-optimal use of resources.
  • Inflation reduces the real burden of debt, both public and private. If you have a fixed-rate mortgage on your house, your salary is likely to increase over time due to wage inflation, but your mortgage payment will stay the same. Over time, your mortgage payment will become a smaller percentage of your earnings, which means that you will have more money to spend.
  • Inflation keeps nominal interest rates above zero, so that central banks can reduce interest rates, when necessary, to stimulate the economy.<ref>{{#invoke:Footnotes|harvard_citation_no_bracket}}</ref>
  • Inflation reduces unemployment to the extent that unemployment is caused by nominal wage rigidity. When demand for labor falls but nominal wages do not, as typically occurs during a recession, the supply and demand for labor cannot reach equilibrium, and unemployment results. By reducing the real value of a given nominal wage, inflation increases the demand for labor, and therefore reduces unemployment.

Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.<ref>Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Ch. 8, p. 139, Fig. 8.1. Macmillan, ISBN 0-333-57764-7.</ref> However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string".<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref><ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> 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.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> 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.<ref name="Mankiw 2002 pp=81–107">{{#invoke:Footnotes|harvard_citation_no_bracket}}</ref><ref>{{#invoke:Footnotes|harvard_citation_no_bracket}}</ref>

Today, most economists favor a low and steady rate of inflation.<ref name="">Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007).[1] p.56</ref> Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.<ref>"Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others" Lars E.O. Svensson, Journal of Economic Perspectives, Volume 17, Issue 4 Fall 2003, pp. 145–166</ref> 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 monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.<ref name=Taylor>{{#invoke:citation/CS1|citation |CitationClass=book }}</ref>

Inflation sections
Intro  History  Related definitions  Measures  Effects  Causes  Controlling inflation  See also  Notes  References  Further reading  External links  

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