It's bad. That's the basic concept of inflation. It can be more scholastically defined as a "substantial and continuing rise in the general price level" (which is the average cost of all the things we buy, and not the price of just one item or class of items). There's too much money (cash in circulation and accounts) and credit (money that has been lent out) in relation to amounts of goods and services. That's inflation, and it's very unpopular with the government as well as the people.

There are different types of inflation. There's demand-pull inflation, which is when the people's ability to spend grows more rapidly than business' ability to produce goods and services. Cost-push inflation is when rising production costs cause an increase in prices.

The people who are the most hurt by inflation are those whose incomes rise at a slower rate than that of prices; lenders whose interest rates are lower than the rate of inflation; and retirees with incomes as their main source of income. Inflation reduces the value of people's savings. Because of this, many people will spend their money while it's worth more than it would be during inflation. This continues to hurt the economy, because it uses savings to provide loans. Inflation also makes it harder for businesses to plan for the future. As a result, they end up feeding off of themselves. In "wage-price spirals," businesses have trouble figuring out how many people to hire and how much to produce while keeping a balance. Businesses and citizens often become victims of "inflationary psychology"; inflation distorts their perceptions of the economy in reality, and it becomes more difficult to spend and save. Inflation can develop into hyperinflation, which can result in social unrest, like that of Germany in the 1920's.

If money and credit grow too rapidly, inflation can occur. If it grows too slowly, a recession can result because people can't take out loans. It is the Fed's responsibility to keep a balance, and it uses different monetary policy tools. Reserve requirements are percentages of money or credit banks must keep on hand or on deposit at the Federal Reserve Bank.

Banks make more money; they can lend out a certain percentage of a deposit so people can take out loans. The requirements rarely change to make it easier for banks to plan for the future. Discount rates are of interest, set by the Fed on short-term loans; this slows inflation by discouraging people to take out loans and purchase at inflated prices, so sellers lower their prices to balance supply and demand. In open market operations, the Fed buys government securities, which lowers federal funds rates (the interest rates banks change each other on short-term loans), and sells these securities so banks have less to lend and interest rates increase. Inflation-indexed bonds are also used to combat inflation; they can be paid back in relation to price rises, so people don't lose money during inflation when the value of money falls.

The Fed also watches for signs of future inflation to help prevent it. It looks over data on commodities and raw materials and manufacturing capacity, for instance. The government helps to fight inflation through fiscal policy. It can cut spending and raise taxes so there is less in circulation. The only drawback to this is that its effects can take a while; it's also politically unpopular and wasteful. Price controls are also virtually ineffectual, because it's hard to get people to obey them. Monetary policy is the preferred anti-inflation tool.

The Consumer Price Index is a favourite inflation measure. The United States Department of Labor tracks changes in prices. It's not always accurate, because it can't track all labor and expenditures. However, it has a strong effect on the national budget. It can lead to more personal tax exemptions, for instance. In the 1990's, the CPI announced that the annual rate of increase was only about 3%. This means growth!

Evidently, it's very difficult and complicated to prevent or fight inflation. However, there are many tools and ways to do so. The White House annually publishes reports on inflation in America, the CPI tracks prices, and the Fed works to keep a balance between money and credit, and goods and services. Inflation isn't great, but it's not permanent and it can be eradicated.