Inflation

Inflation is the rate at which the general level of prices for goods and services rises over time, eroding purchasing power. Economists typically measure inflation with price indices such as the consumer price index (CPI) or the personal consumption expenditures price index (PCE). Inflation is a broad concept; individual prices can rise or fall while the overall price level increases.

Inflation has several possible causes. Demand-pull inflation occurs when aggregate demand exceeds an economy's productive capacity. Cost-push inflation arises from higher production costs, including wages and commodity prices. Built-in inflation reflects expectations and wage–price dynamics, often involving a wage–price spiral, where higher wages feed higher prices and vice versa.

Inflation is commonly reported as the annual percentage change in a price index. Real values are adjusted for inflation, whereas nominal values are not. Central banks often publish core inflation measures that exclude volatile items such as food and energy to gauge underlying price trends. Differences in measurement can affect comparisons over time and across countries.

Effects of inflation include reduced purchasing power, particularly for those with fixed incomes; potential redistributions between borrowers and lenders when interest rates do not fully align with price changes; and distortions in saving and investment decisions. High or unpredictable inflation can raise uncertainty and reduce economic efficiency, while very low or negative inflation may also pose challenges.

Policy responses focus on price stability, typically through monetary policy conducted by central banks using tools such as interest rate adjustments and open market operations, sometimes complemented by fiscal policy. Many economies pursue explicit inflation targets to anchor expectations. Historical episodes include periods of high inflation in the mid- to late 20th century, followed by disinflation, and the generally low-inflation environments of recent decades.