Inflation affects virtually everyone. For consumers, it means that their money buys less — prices rise, but wages may not keep pace. For savers, inflation erodes the real value of money over time. Businesses face uncertainty in pricing and cost forecasting, while investors must seek inflation-beating returns. For governments, inflation complicates fiscal planning and can lead to interest rate hikes that slow down growth.
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Central banks use monetary policy to control inflation. The most common tool is adjusting interest rates. Raising rates discourages borrowing and reduces spending, helping to cool the economy. Other tools include open market operations and reserve requirements for banks. However, raising interest rates too aggressively can trigger a recession, so policymakers must walk a fine line.
