Why is inflation considered an important economic indicator?

Inflation is considered an important economic indicator because it reflects the purchasing power of money. When inflation rises, the value of money decreases, meaning that consumers can buy less with the same amount of currency. This directly affects how individuals and businesses make financial decisions, as changes in inflation can signal shifts in the economy's health.

For instance, if inflation is high, consumers may alter their spending habits, preferring to buy now rather than later, as future prices could be higher. This can lead to changes in consumption patterns and, subsequently, in economic growth. Central banks monitor inflation closely to inform their monetary policy decisions, such as adjusting interest rates, which can further impact economic activity. Understanding inflation's effects on purchasing power is crucial for both consumers and policymakers, making it a key indicator of economic stability and health.