High inflation erodes the value of a currency and is therefore considered very bad for any economy in most circumstances. Central banks normally target an inflation level of around 2-3%, and if their target is exceeded, they usually take action to get back to the desired levels. When inflation is high, the market begins to expect that central banks may increase interest rates, reducing the supply of money in the economy, and lowering inflation. The expectation of an interest rate hike will cause the currency to strengthen, as the market prices-in the anticipated change in an effort to benefit from an announcement before it is officially made. Common measures of inflation include the Consumer Price Index (CPI) and the Producer Price Index (PPI), and are usually released on a monthly basis.

Note:If inflation is above expectations, the currency is likely to strengthen, while lower than expected inflation is likely to weaken the currency.