How does a low rate of inflation affect the economy?

What Is Inflation-And How Does It Affect Our Economy?

• Today 16 Jan 07 the Government put up our inflation rate to a eleven year high. What is inflation? (I know it effects our everyday purchases) What is the purpose of inflation? Thank you

• Answer:

  If you have ten pounds and kept it under your mattress for a year you will find out that you can buy less things with the same ten pounds note. That is because prices went up. The current rate of inflation is around 2 % that mean that you need to make an extra 2 % a year more money to maintain your living standard. Interest rate has to be above the rate of inflation other wise you are not making any money if you leave your money in the bank. There is no real purpose of inflation it just happens because there is an increase in the money supply. For example if the Bank of England decides to print an Extra billion pounds for no reason the actual value of the pound will go down. This is exactly what happened in Russia i think in 1998. The government does not make the rate of inflation, it just try to keep it low. I think you are confusing interest rate with inflation! I hope that i explained it clearly.