Why Is Inflation Important?

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According to the International Monetary Fund, inflation is an important economic statistic because it affects the value of money and indicates the overall stability of a country’s economy. Inflation is a gradual continuous increase in the price of goods and services. A stable yearly inflation amount is typically between two and four percent, reports Economics Help.

The International Monetary Fund notes that inflation is calculated using a country’s consumer price index (CPI) which measures the average amount of consumers’ cost of living expense for the year. Inflation is measured as the percent change in CPI over time, usually one year. Price stability can alternately be measured using gross domestic product (GDP) and core consumer inflation. GDP takes into account all of the goods produced in an economy, not just the consumed goods. Core consumer inflation is measured by excluding prices that are set by the government and those of volatile products, including food and energy, that may change frequently.

Economics Help notes that high rates of inflation increase costs and make a country’s exports less competitive in the global marketplace. Fluctuations in inflation, such as a large increase in prices followed by a decrease, can cause decreases in economic growth, reduce spending, decrease investments and increase interest rates. Any inflation over 10 percent per year is potentially problematic for the country’s economy.