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Inflation is the general increase in prices and a sustained fall in the purchasing power of money. It means that over time, a given amount of money buys fewer goods and services. In macroeconomic statistics, inflation is usually measured as the percentage change in a price index, most often the consumer price index (CPI) or the personal consumption expenditures price index (PCE). The rate is typically reported on a year-over-year basis.

Several forces can cause inflation. Demand-pull inflation arises when demand for goods and services grows faster than supply. Cost-push inflation occurs when production costs rise, pushing firms to raise prices. Built-in or wage-price inflation reflects expectations of higher wages and prices, creating a self-reinforcing cycle. Monetary factors, such as a loose money supply or low interest rates, can amplify these effects.

Inflation can vary in intensity. Moderate or low inflation is common in well-functioning economies, but high inflation or hyperinflation erodes purchasing power quickly and creates uncertainty. Inflation also affects savers, borrowers, workers on fixed incomes, and the allocation of resources.

Policy responses aim to maintain price stability and are usually conducted by central banks. The primary tool is interest rate adjustments, often complemented by communications, macroprudential measures, and, in some cases, balance sheet actions. Fiscal policy can support or counter inflation through demand management or supply-side measures. Inflation targeting is a common framework, with the objective of keeping inflation near a specified goal.

Measurement has limits: CPI and PCE differ in scope, and core measures exclude volatile items like food and energy. Quality changes and housing costs can influence readings.