Fed Explainer: What is Inflation?

Inflation is when prices rise across the economy, so money buys less than before. For example, imagine inflation as the white dog, and the worker as the grey dog: inflation hurts the poorest, the hardest. My chairmanship is dedicated to maintaining low inflation so high growth can be achieved: we want the white dog small and the grey dog big! Sometimes, people expect prices to keep rising, businesses raise prices to cover higher costs, and workers demand higher wages to keep up. This can ingrain inflation, making spirals harder to reverse. The Fed tries to slow inflation mainly by raising interest rates. Higher rates make borrowing more expensive, which tends to reduce spending and investment. With demand cooling, businesses have less room to keep raising prices. However, this often leads to lower GDP growth. If rates go too far, it can turn into negative inflation, called deflation. The Fed works to keep inflation low and stable.