INFLATION

Inflation is the rate of increase of the price of goods and services during a determined period of time. A continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.

Inflation causes a loss of purchasing power due to the fact that the increase in prices causes that a greater amount of money having to be used to purchase factors of production, goods, and services, and therefore savings decrease and financial needs grow.

Inflation is determined by Harmonized Index of consumer prices (HICP). Although it is more common to hear about consumer price index (cpi) which is a statistical measure that represents the evolution of the goods´ and services´ prices that households consume. The group of goods and services, which is defined as a basket, is basically obtained from a family´s consumption and the importance of each and every one of them in the calculation of the HICP is determined by such consumption.

Another index used to determine inflation is the Industrial Product price Index (IPPI) which measures the evolution that the prices of industrial products in a country.

The rate of decrease in prices is called deflation and it also carries undesirable consequences; a reason why central banks must watch over price stability, keeping inflation at a low level by fixing interest rates correctly.