Inflation is a general increase in the level of prices throughout the economy. The most widely recognized measure of inflation is the Consumer Price Index. Unanticipated inflation alters the incentives normally created by price signals in the economy. The incentive to save diminishes as inflation erodes the value of savings accounts and fixed incomes. The incentive to spend and to accumulate debt increases as consumers act in anticipation of rising prices and wages.
Inflation creates additional uncertainty.
Predicting the future is more risky and mistakes are more costly. Interest rates rise to cover the expected inflation rate. Inflation rarely occurs except as a consequence of rapid increases in a society s stock of money. The Federal Reserve System, an agency independent of but established by the federal government, controls the stock of money in the United States through monetary policy. The Fed often faces political pressures from government, private interests, and the media to follow policies that cause the money stock to grow too rapidly for price stability.