What is inflation?

Inflation is the rate at which the prices of things such as goods and services increase, while the purchasing power of the money in your wallet is falling.

In other words, as inflation increases your money buys you less.

By increasing the interest rates central banks, such as the Reserve Bank, make it more expensive to borrow money. Theoretically this means that consumers tend to have less money to spend and inflation decreases.

The difficulty that central banks have is that increasing interest rates also tends to slow the economy, so they have to try and strike a balance between economic growth and keeping inflation under control.