This indicator measures the government’s commitment to sound monetary policy.
Relationship to Growth & Poverty Reduction
Research shows that high levels of inflation are detrimental to long-run growth. 1 High inflation creates an environment of risk and uncertainty, drives down the rate of investment, and is often associated with distorted relative prices and tax incentives. 2 Inflation can also hinder financial market development and create incentives for corruption. 3 In addition, inflation often has a direct negative impact on the poor. When inflation is associated with swings in relative prices, it usually erodes real wages and distorts consumption decisions. 4
This indicator measures the most recent one-year change in consumer prices. The indicator reflects average annual percentage change for the year, not end-of-period data.
In keeping with economic research findings, MCC considers countries with inflation below 15 to be passing this indicator.