3. What are the causes of inflation? How is inflation measured?

How inflation influences economy

Inflation can be either a negative or positive phenomenon depending on the speed of its growth and other events in the economy. Excessive inflation is considered bad for the economy, yet no inflation at all is also a negative event. Most economists consider stable inflation of 2% a year optimum.
Here is how inflation influences the economy depending on its speed:

• 
  Moderate inflation is under 10% a year, and thanks to being predictable and controllable it supports sustained growth of the economy and does not lead to abrupt depreciation of the national currency.
  
• 
  Galloping inflation is between 10% and 100% a year. It has a negative influence over the country’s economy. Producers of goods and services prefer binding prices to some stable and convertible global currency. People try to save their money by investing it in various material goods: cars, household appliances, real estate – thus heating up prices additionally.
  
• 
  Hyperinflation is especially high, above 100% a year. Quite often such inflation can be a consequence of acute political crises or wars that demand decisive actions from the government. This can totally destroy the turnover of goods and cash and the whole financial system of the country due to the loss of trust in money.
  

Methods of controlling inflation

The financial regulator of the country bears the responsibility of fighting back inflation. This is done by certain measures of the credit and monetary policy. Here are the main methods by which Central Banks can influence inflation.

• 
  Deterrent credit and monetary policy is nowadays one of the most popular ways of controlling inflation. The goal of such a policy is to decrease money supply in the economy by increasing the interest rate. This helps to cool down the economy, making credits pricier and thus decreasing spendings of consumers and companies. The CB can sell securities in the open market, increse reserving norms for commercial banks, and apply other measures of selective credit control. Increases in the interest rate have a bad influence on the stock market but facilitates growth of the national currency.
  

•