The resource for personal investors.

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Over time the price of goods and services tends to increase, which is called inflation. A classic example is with house prices, which are more expensive than they were in the past.

Inflation is the enemy of investors. If the inflation rate is 2%, and your investments are returning less than that, your money is being eroded in real terms.

When there is a lot of money in the economy, this can drive inflation, especially in products and services with a limited supply. Central banks will take action when inflation is getting too high, by restricting the supply of money, typically by raising interest rates.

High inflation can be problematic, but negative inflation is also known to happen, and it can be bad for the economy. If the price of goods is falling over time, there's a tendency for people to defer purchases as they know they'll get a better price in the future. This makes it harder for businesses to sell their products. Central banks will usually reduce interest rates to help stimulate purchases in this scenario.

Central banks aim to keep inflation at low single digits.

The Bank of England has a handy inflation calculator, so you can see how the value of money has changed over time.