DEFINITION of Inflation

Inflation is a sustained increase in the price level of goods and services in an economy over a period of time.


When the price level rises, each unit of currency buys fewer goods and services. It reflects a reduction in purchasing power per unit of money. Also a loss of real value in the medium of exchange and unit of account within the economy.  

This can also be viewed as a devaluing of currency. A chief measure it is the inflation rate. It is the annualized percentage change in a general price index. Usually the consumer price index, over time.

Keeping this trend levels consistent and in check is the responsibility of a central bank. It is usually measuring using a consumer price index (CPI). That which tracks the cost of a basket of consumer goods and services.

Changes in this low trend can have a major impact on financial markets. Because they affect purchasing power. And can bring about change in a central bank’s monetary policy.

This increase in the price level affects economies in different positive and negative ways.

The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation. This may discourage investment and savings. If this increase in the price level is speedy enough, shortages of goods as consumers begin hoarding. Because of concern that prices will increase in the future.


Positive effects include reducing unemployment due to nominal wage rigidity.

Economists generally believe that the high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Today, most economists favor a low and steady rate of this.

Low inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn. Hence, reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. Low increase in the price levels stands opposed to zero or negative.

The opposite of inflation is deflation.