Inflation

Inflation refers to a sustained rise in the overall level of prices in an economy.

The inflation rate is the percentage change in a price index—that is, the speed of overall price level movements.

The inflation rate is pro-cyclical but with a lag of a year or more.

Monetary policy determines interest rates and the available quantities of money and loans in an economy.

A high inflation rate combined with fast economic growth and low unemployment usually indicates the economy is overheating.

If a high inflation rate is combined with a high level of unemployment and a slowdown of the economy—an economic state known as stagflation—the economy will typically be left to correct itself because no short-term economic policy is thought to be effective.