Inflation reduces the value of money through increases in the general price level in an economy. The most common way to measure the inflation rate is through changes in the Consumer Price Index (CPI). The CPI measures the average price of a basket of consumer goods and services that reflects household consumption.
In the 1970s, inflation rates increased rapidly throughout the global economy, mainly due to the oil crisis. However, as most OECD countries adopted more restrained monetary policies in the 1980s, inflation began to decrease. Since then, inflation rates have generally been low in advanced economies.
Sweden, however, saw another period of rapidly increasing inflation in the late 1980s. The reason for this was a combination of a very expansive economic policy financed by large budget deficits, generous wage increases and repeated devaluations of the Swedish currency. In the beginning of the 1990s, Sweden faced a severe economic crisis and had to abandon its fixed exchange rate. During this period a number of reforms were also implemented. Among other things Sweden changed its monetary policy to focus more on price stability. For example, the Swedish government tasked the Swedish Central Bank, the Riksbank, with keeping the inflation rate at approximately two percent. Another factor that contributed to lower inflation was that nominal wage increases came down.