An increase in the cost of goods and services. The Federal Reserve’s goal is for the inflation rate to be in the low single digits each year. When inflation is too high, prices rise faster than wages, meaning money loses its purchasing power – making it harder for consumers to afford the cost of goods and services. The Fed responds by raising interest rates; by increasing the cost of borrowing, consumers and businesses reduce their spending, which reduces inflation. But when prices are rising too slowly or even declining (called deflation), consumers and businesses stop buying entirely, in the expectation that prices will get even lower. That causes businesses to lose money, resulting in layoffs. The Fed responds to low inflation by lowering interest rates; by making loans cheaper, consumers and businesses are more willing to borrow – spurring spending and increasing inflation.