Inflation refers to the overall increase in prices of goods and services in an economy. It is typically measured by the Consumer Price Index (CPI), which tracks the average change in prices of a basket of goods and services commonly purchased by consumers.
Real GDP (Gross Domestic Product) measures the total value of goods and services produced in an economy, adjusted for inflation. Inflation and real GDP have an inverse relationship, meaning that when inflation increases, real GDP decreases and vice versa.
The government can control inflation through monetary and fiscal policies. Monetary policies involve actions taken by the central bank, such as adjusting interest rates and controlling the money supply. Fiscal policies refer to government spending and taxation, which can also impact the level of inflation in an economy.
High levels of inflation can have negative effects on the economy, such as reducing consumer purchasing power, increasing interest rates, and lowering real GDP. It can also lead to uncertainty and instability in the economy, making it difficult for businesses to plan and invest.
Inflation can have varying impacts on different groups of people. For example, those on fixed incomes or with savings may struggle to keep up with rising prices, while borrowers may benefit from lower real interest rates. Inflation can also disproportionately affect low-income individuals who may have less flexibility in their budgets to accommodate price increases.