Definition and examples of inflation

DEFINITION AND EXAMPLES OF INFLATION
What Is Inflation?
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and prices decline.
Key Takeaways

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  Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
  
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  Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.
  
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  The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
  
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  Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
  
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  Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.
  

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What Is Inflation?
Understanding Inflation
While it is easy to measure the price changes of individual products over time, human needs extend beyond one or two such products. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labor.
Inflation aims to measure the overall impact of price changes for a diversified set of products and services, and allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time.
The U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index For All Urban Consumers (CPI-U) was up by 7.5% in the 12-month period ending January 2022, the largest 12-month increase since the period ending June 1982.1
As a currency loses value, prices rise and it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.

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To combat this, a country's appropriate monetary authority, like the central bank, then takes the necessary measures to manage the supply of money and credit to keep inflation within permissible limits and keep the economy running smoothly.
Theoretically, monetarism is a popular theory that explains the relation between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, the value of money fell, contributing to rapidly rising prices.2
Inflation is measured in a variety of ways depending upon the types of goods and services considered and is the opposite of deflation which indicates a general decline occurring in prices for goods and services when the inflation rate falls below 0%.