Inflation

Inflation is the rate at which prices increase. In a healthy economy, prices usually increase about 2% per year. It’s the opposite of deflation – when prices decline. A little bit of inflation is good for the economy, but too much (“hyperinflation”) can be devastating because it makes one’s savings virtually worthless – the economy of Venezuela is a good example of this. Central banks, like the US Federal Reserve, try to maintain healthy rates of inflation by using their power over interest rates to either encourage economic growth by lowering interest rates or to keep growth from overheating by raising interest rates (because growth that is too low can lead to deflation while growth that is too high can lead to inflation).