Finance Dictionary
Inflation
Definition
A general increase in prices and fall in the purchasing power of money.
Deep Dive
Inflation refers to a sustained general increase in the prices of goods and services within an economy over a period, leading to a corresponding fall in the purchasing power of money. Essentially, each unit of currency buys fewer goods and services than it could previously. This economic phenomenon can stem from various factors, including an increase in the money supply, strong consumer demand outstripping supply (demand-pull inflation), or rising production costs (cost-push inflation).
Examples & Use Cases
- 1The average price of groceries and fuel increases by 10% over a single year, meaning consumers can buy less with the same amount of money
- 2A worker receives a 3% salary raise, but if inflation is 5%, their real purchasing power has actually decreased
- 3During a period of hyperinflation, a loaf of bread that cost $1 today might cost $100 next week, rendering currency almost worthless
Related Terms
DeflationPurchasing PowerConsumer Price Index (CPI)