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Inflation is a general increase in prices and fall in the purchasing value of money. It is a measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Inflation is often expressed as a percentage change in a general price index over time. It can be caused by various factors, including increases in demand, supply shortages, government policies, and changes in consumer expectations.

Inflation can have both positive and negative effects on an economy. On the positive side, it can stimulate economic activity by increasing consumer spending and encouraging businesses to invest. However, high inflation rates can erode purchasing power, leading to reduced consumer spending and potentially causing economic instability. Central banks often aim to control inflation within a target range to maintain economic stability.

There are different types of inflation, including demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation occurs when demand for goods and services exceeds supply, leading to higher prices. Cost-push inflation happens when production costs rise, forcing businesses to increase prices. Built-in inflation refers to the expected increase in prices due to factors like wage increases or changes in consumer preferences.

Measuring inflation involves tracking changes in the prices of a representative basket of goods and services over time. Common inflation measures include the Consumer Price Index (CPI) and the Producer Price Index (PPI). These indices help policymakers, businesses, and individuals understand the rate of inflation and make informed decisions.

To manage inflation, central banks use various tools, such as adjusting interest rates, implementing monetary policy, and engaging in open market operations. Governments may also use fiscal policy, including taxation and spending, to control inflation. Effective inflation management is crucial for maintaining economic stability, promoting growth, and ensuring long-term prosperity.