When you look at the prices of a basket of goods and services that most people use in their daily lives, you can see how inflation works. When that morning cup of coffee costs more than it used to, you can be sure that inflation is at work.
The rate at which prices rise can have wide ramifications throughout an economy. For example, high levels of inflation can erode the value of your savings or reduce the real income you need to buy something with. Governments and central banks aim for manageable inflation so that consumers can keep spending money, which enables companies to keep producing the goods and services they need to operate.
A slow economy can lead to a decline in demand, which can slow the pace at which prices are rising or even cause them to fall. In that scenario, businesses may have to scale back production, leading to higher corporate profits and lower employment pressures on households. Likewise, the demand for raw materials could decrease, which can lead to shortages and higher prices for products.
A slowing economy can also push up interest rates, making it more expensive for consumers and businesses to borrow money. This is when inflation becomes dangerous, and the Federal Reserve may increase the amount of money it is supplying to the economy in an attempt to cool off the rate at which prices are rising.
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