What is inflation

Inflation: Basic Definition

Inflation is a term used in economics to describe increases and decreases of prices. In simpler terms inflation is a decline in the purchasing power of money for goods and services and deflation is the opposite, an increase in the purchasing power of money for goods and services.

What inflation means for most people is a higher cost of living. In other words it costs you more to buy the same amount of stuff. Inflation usually goes hand in hand with a growing economy and deflation is usually seen during recessions.

Example

If you earn $10 on Monday and the price for a loaf of bread is $1, then you are able to purchase 10 loaves of bread. For the sake of this example let’s assume inflation is extremely high and on Wednesday the price for a loaf of bread is $2. Because of this high rate of inflation the purchasing power of your $10 dollars earned on Monday has been reduced significantly by Wednesday and you are only able to purchase 5 loaves of bread. This is an extreme example (called Hyperinflation) but it demonstrates the effects of inflation.

Inflation: Advanced Definition

Inflation (as accepted by many economists) technically speaking should be defined as the increases and decreases of the money supply (i.e. currency).

However, a more useful definition is often used and hence we can define inflation as a decline in the purchasing power of money for goods and services. The purchasing power is determined by selecting a base year (or duration of years) for comparison purposes.

Additional resources:
Consumer Price Index (CPI)
Inflation Rates