Inflation
Inflation is a sustained rise in the general level of prices, which reduces the purchasing power of money.
When prices rise across the board, money quietly loses its power, and that erosion, inflation, shapes everything from wages to politics.
Inflation is a sustained rise in the general level of prices across an economy, which reduces the purchasing power of money: each unit buys less than before. It is measured by tracking the price of a representative basket of goods and services over time.
General, not particular
The word general matters. Inflation is not one product becoming dearer, which may simply reflect that product's own supply and demand, but the broad price level rising, so that money itself is worth less. A useful way to see it is that inflation is as much about the value of money falling as about prices rising; the two are the same phenomenon viewed from opposite sides.
Causes and the moderate ideal
Inflation arises when demand outruns the economy's capacity to supply, when costs such as energy or wages rise across the board, or when the money supply expands faster than output. Most central banks aim not for zero inflation but for a low, steady rate, commonly around two per cent, on the view that a little inflation greases the economy, while deflation and high inflation both do damage. The target is stability and predictability more than any particular number.
Why it does harm
Moderate, expected inflation is manageable; high or volatile inflation is corrosive. It erodes savings, arbitrarily redistributes wealth from lenders to borrowers, distorts the price signals that coordinate the economy, and forces people to waste effort protecting themselves from it. When inflation becomes unanchored, expectations of future inflation can become self-fulfilling, which is why central banks treat credibility, the public's belief that they will keep inflation in check, as their most precious asset.
Inflation is among the most politically charged numbers in economics because it touches everyone, silently, every day. Understanding it as the falling value of money, driven by the balance between demand, costs, and the money supply, is the foundation for understanding much of what central banks and governments spend their time worrying about.