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Inflation definition
Inflation is a sustained rise in the general level of prices across an economy. It means money loses purchasing power, because each unit of currency buys fewer goods and services over time.
Inflation is measured by price indices such as the Consumer Price Index, which tracks the cost of items such as food, housing, transport, and healthcare. The inflation rate, usually quoted as an annual percentage, shows how fast prices are rising over a set period. Central banks often raise interest rates to cool high inflation and lower them to lift it when it runs too low.
Inflation is the opposite of deflation, a sustained fall in the general price level. Mild inflation is the normal target for most central banks, while deflation can be harder to manage because falling prices tend to push consumers and businesses to delay spending. Persistent inflation erodes savings, wages, and real investment returns, so investors adjust portfolios to protect against it.
Inflation Example
An item costs USD 100 this year.
If inflation runs at 5%, the same item costs USD 105 next year:
USD 100 √ó 1.05 = USD 105
You need more money to buy the same item, so the purchasing power of your cash has fallen.
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