Definition
Inflation occurs when the overall price level of goods and services rises over time. It is usually measured with indexes such as the Consumer Price Index or the Personal Consumption Expenditures price index.
Political Dictionary
Inflation
Inflation is a broad increase in prices that reduces the purchasing power of money.
Why It Matters
Inflation affects household budgets, wages, savings, interest rates, government policy, and business planning.
How It Works
Statistical agencies track a representative basket of goods and services and compare price changes over time.
History
Modern governments began measuring inflation systematically in the twentieth century as national statistical systems and central banking developed.
Example
If average prices rise 3 percent in a year, a dollar generally buys less than it did the previous year.
Common Misconceptions
- Inflation means every price rises equally.
- Any single price increase proves inflation.
- Moderate inflation always harms every borrower and saver in the same way.
Related Terms
Related Topics
See Also