To most of you, inflation as a target of macroeconomic policy must be something of a mystery. Why should we worry if prices each year increase by a few percentage points? I will come back to this question, but let’s first be clear about what is meant by inflation and how it can be calculated.
We can define inflation as the rate of increase in the average price level in an economy. It is important to be clear about this, and not to confuse the price level with its rate of change. You will also come across the terms ‘deflation’ and ‘disinflation,’ so what is the difference?
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