Inflation is a term used in economics to describe a general increase in the prices of goods and services over time. This means that each unit of currency buys fewer goods and services, resulting in a reduction in the purchasing power of money. Inflation is usually measured using the consumer price index (CPI), which is the average price increase of a basket of selected goods and services over some period of time. The opposite of inflation is deflation, which occurs when prices decline and purchasing power increases.
There are different types of inflation, including demand-pull inflation, cost-push inflation, and built-in inflation. The most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price Index. Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change. Those with tangible assets, like property, may benefit from inflation, while those on fixed incomes may be negatively impacted.
Inflation can be caused by fluctuations in real demand for goods and services or changes in available supplies such as during scarcities. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a signal of pricing stability.
