Why is inflation important

A low and stable inflation rate improves the well being of the population. This is manifested in various ways:. Skip to main content. You are here Inicio Monetary Policy Why is it essential to have a low and stable inflation rate? Leonardo Villar. Roberto Steiner. Member of the Board of Directors. Bibiana Taboada. Mauricio Villamizar. Jaime Jaramillo-Vallejo. Alberto Carrasquilla. Art Museums Musical activity at Banrep Museos de arte La actividad musical del Banrep Study Programs Abroad.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Understanding Inflation. Types of Inflation. What Does Inflation Impact? Understanding Hyperinflation. Understanding CPI. Related Terms A-I. Related Terms J-Z. Economy Economics. Key Takeaways Inflation, in the basic sense, is a rise in price levels.

Economists believe inflation comes about when the supply of money is greater than the demand for money. Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth.

Some believe inflation is meant to keep deflation in check, while others think inflation is a drag on the economy. John Maynard Keynes said that some inflation helps prevent the Paradox of Thrift—delayed consumption. Article Sources. Investopedia requires writers to use primary sources to support their work.

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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. We focus on price changes that are more widespread and persistent—ones that could push inflation away from the target for a while.

Together, they help us look past the bumps and wiggles of different price changes so that we can see the underlying trend of inflation. Inflation targeting plays an important role in ensuring people continue to expect inflation to be around 2 percent. And when people expect inflation to stay under control, they act in a way that tends to bring that about.

People will shrug off short-term changes in prices if they believe inflation will remain low in the long run. Their confidence that inflation will remain low helps keep inflation low by allowing the economy to stabilize after short-term bumps.

Throughout the s, prices increased by an average of about 8 percent per year. At that rate, it would take only 9 years for prices to double. When inflation is around 2 percent per year, it takes about 35 years for prices to double.

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