What is inflation?

Inflation is defined as the rate at which the general level of prices for goods and services rises, eroding purchasing power. When inflation occurs, each unit of currency buys fewer goods and services, which means that over time, the cost of living increases. This phenomenon is typically measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI), reflecting changes in the price levels of a selected basket of goods and services.

Understanding inflation is crucial because it impacts economic decisions made by consumers, businesses, and policymakers. A moderate level of inflation is considered normal in a growing economy, but when inflation rises too quickly or becomes hyperinflation, it can destabilize the economy and reduce confidence in the currency. Ultimately, recognizing inflation helps individuals and investors make informed financial decisions regarding savings, investments, and spending.