Inflation is when there is altogether more money in a country than there are products and goods. How can this happen? It occurs, for example, when the top bank in a country, the central bank, allows too much money to be printed. The reason for this can be that a government has too many debts and asks the central bank to print more money to pay them. However, this only happens rarely these days, because most governments and central banks know that doing so is dangerous for a country’s economy.
Inflation can start when certain products are bought faster than they can be produced. At first, the prices increase, and people buy the products even faster before they become yet more expensive. Often, people and companies are worried that other articles could also become more expensive and buy these as well. This can mean that everybody starts quickly spending money instead of keeping it. Perhaps people also take on debts so they can buy even more products. The now rare products become more and more expensive, and the large amount of money that is needed to buy them loses more and more value.
For this reason, the central banks are always on the alert when prices increase, and keep a close eye on how fast people are spending their money. To make sure people do not take on even more debts, encouraging inflation, the bank makes it more expensive to borrow money. The most important task of central banks is thus to ensure that the value of our money remains stable.