In general terms, inflation is economic process of prices increasing overtime. The inflation rate is the percentage change in prices from one period to the next. Annual inflation rates are those more keenly observed by a wider audience given that fluctuations in prices can be temporary. That said, monthly inflation rates are followed closely by those hoping to assess the direction in which the price level is headed.
Inflation is not necessarily a negative process; in fact most economists agree that the negative impact of small levels of inflation is outweighed by the risk of deflation. Deflation is the scenario in which the interest rate is negative. Moreover, inflation can also increase pressure on consumption spending that boosts economic activity as the purchasing power of money falls overtime. What must be avoided are high levels of inflation or at the extreme hyperinflation. Hyperinflation can render private savings utterly useless in a short space of time creating social problems and uncertainty.
Generally, high periods of growth are correlated with inflation due to the wage-price spiral. As economies grow, incomes grow. In turn, additional demand causes prices to rise. Workers then demand higher wages to afford the new higher prices. Thus the spiral continues. Here we see that inflation in the United States is reasonably low as economic growth is also reasonably low compared to developing economies around the world. This in part explains why projected inflation rates for the United States are lower than projected global inflation rates.
In 2012 the United States Federal Reserve set an inflation target of 2 percent per year. Although inflation targeting is a decades old policy approach adopted by central banks worldwide after being pioneered by New Zealand in 1990, it was the first time the United States had set such a target. The purpose of having an inflation target is to provide policy transparency and stability in market expectations. By setting a positive target countries are also more likely to avoid deflationary pressures and the negative economic impacts of such a scenario in the near future. Projections for the annual inflation rate until 2022 suggest coming close to such targets may be an achievable goal.
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