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Inflation is a rise in the level of prices measured against some baseline of purchasing power (a CPI or consumer price index). Inflation happens because of the interaction between the supply of money, production and interest rates.

Some believe that fiscal policy effects (monetary adjustments) dominate all others in setting the rate of inflation. Others believe a combination of the interaction of money, interest and output dominate over other effects.

Regarding unemployment you need to understand that unemployment occurs naturally in the labor market. There will always be a percentage of people that are unemployed, in between jobs (voluntarily or not), taking a break, milking the system, etc.

Central Banks or other government institutions can and do affect inflation to a significant extent mainly through the setting of interest rates, this is known as using monetary policy. By rising interest rates and allow for a slow growth of the money supply a Central Banks can fight inflation in the short to medium term, thus using unemployment and the decline of production to prevent price increases.

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Q: Policies used to combat inflation in south Africa?
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