What does inflation refer to in economics?

Inflation refers to the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. When inflation occurs, each unit of currency buys fewer goods and services than it did previously. This phenomenon is a critical component of economic analysis, as it affects both consumer behavior and economic policy decisions.

Understanding inflation is vital because it can influence interest rates, wage negotiations, and overall economic stability. An increase in prices can signal a growing economy; however, if inflation is too high, it can erode consumer confidence and lead to economic distress. Monitoring inflation helps policymakers take necessary actions to maintain economic stability and growth. Other choices may relate more to aspects of the economy but do not define inflation itself.