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Inflation is the rate at which the general price level of goods and services rises over time, reducing the purchasing power of a currency. It is commonly measured using price indices such as the Consumer Price Index (CPI) or the GDP deflator, which track changes in a representative basket of goods and services. Inflation is an average measure and does not imply that every item becomes more expensive at the same rate.

Causes of inflation are typically grouped into three broad categories. Demand-pull inflation occurs when aggregate demand exceeds the economy’s capacity to produce goods and services. Cost-push inflation arises when production costs rise, pushing up prices. Built-in inflation reflects price increases that stem from adaptive wage and price-setting behavior, often linked to expectations of higher future inflation. External factors such as commodity price shocks, exchange rate changes, and supply disruptions can also influence inflation.

The effects of inflation are varied. Moderate inflation can reflect healthy demand growth, but high or unstable inflation erodes purchasing power, creates uncertainty, and distorts spending and investment decisions. It can redistribute income between borrowers and lenders and affect savers and retirees differently. Long periods of high inflation can lead to menu costs and reduced real investment.

Policy responses aim to keep inflation stable and predictable. Central banks use instruments such as policy interest rates, reserve requirements, and, in some cases, quantitative easing. Inflation targeting—publicly aiming for a low and stable rate—has become common in many economies. Inflation dynamics are influenced by global factors, including commodity prices, exchange rates, and globalization, as well as domestic fiscal and monetary policy.