Monetary policy

What is inflation?

Inflation is defined as the increase in the general level of consumer prices in an economy.

An increase in the general price level causes money to lose value: if prices rise a lot, the same amount of money will buy less tomorrow than it does today. Inflation therefore affects us all and diminishes our purchasing power.

Inflation also has redistributive effects in a society: it eases the real debt burden for borrowers, but reduces the returns for savers. This reduction affects households with cash savings (banknotes or bank deposits) more than those with savings in other assets, such as housing or shares, which tend to yield higher returns than cash (in fact, cash offers zero return) and therefore better protect the real value of savings against erosion by inflation.

In the euro area, inflation is measured by the Harmonised Index of Consumer Prices (HICP).

The European Central Bank (ECB) has committed to steering its monetary policy to ensure that inflation stands at 2% over the medium term, thus maintaining price stability. To achieve this, the ECB Governing Council bases its decisions on its monetary policy strategy.