What is inflation?

Inflation refers to a general increase in prices across an economy over a period of time. This phenomenon indicates a decrease in the purchasing power of money, meaning that as prices rise, each unit of currency buys fewer goods and services. Inflation is typically measured using indices like the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track changes in the price levels of a basket of consumer goods and services or the prices received by producers for their goods, respectively.

When inflation occurs, it affects various sectors of the economy, influencing everything from consumer spending to investment decisions. For example, if prices are expected to rise, consumers may buy goods sooner rather than later, while businesses may adjust their pricing strategies or invest in inventory based on anticipated costs. Understanding inflation is vital for formulating economic policies aimed at stabilizing or stimulating the economy.

The other options represent concepts that do not accurately define inflation: a decrease in overall prices indicates deflation, not inflation; rises in consumption rates can happen independently of price changes; and a drop in production costs might lead to lower prices, but it does not itself constitute inflation.