What is inflation?

Inflation is defined as the rate at which the general level of prices rises, leading to a decrease in the purchasing power of money. This phenomenon indicates that as prices rise, each unit of currency buys fewer goods and services. It is commonly measured by price indices, such as the Consumer Price Index (CPI), which tracks changes in the price level of a selected basket of goods and services over time.

Understanding inflation in this context is crucial, as it captures the overall economic climate affecting consumers and businesses. When inflation is present, wages may not keep pace with rising prices, which can erode purchasing power and influence consumer behavior. Hence, the definition effectively encapsulates the broader implications of inflation on the economy and individual financial situations.