Inflation
A sustained increase in the general price level of goods and services.
Simple Explanation
Inflation means prices are going up over time. When inflation is 3%, something that costs $100 today will cost about $103 next year. It's why your grandparents paid much less for things than you do — and why central banks work to keep it under control.
In Detail
Inflation is a sustained increase in the general price level, typically measured by the Consumer Price Index (CPI). It reflects the rate at which purchasing power is eroding. Central banks target stable inflation (usually around 2%) because both excessive inflation and deflation create economic distortions.
Why It Matters
Inflation is the most fundamental economic concept for understanding why prices change. It affects every person, business, and government decision. Central banks exist primarily to manage it. Wages, interest rates, exchange rates, and government budgets all respond to inflation. Understanding inflation means understanding why your money buys less over time — and what policymakers try to do about it.
Key Ideas
Prices Rise Over Time
Inflation means the general level of prices is increasing. A 3% inflation rate means that a basket of goods costing $100 today would cost roughly $103 a year from now. Individual items may rise more or less, but the average goes up.
Measured by CPI
The most common measure is the Consumer Price Index (CPI), which tracks the cost of a representative basket of goods and services that households typically buy — food, housing, transportation, healthcare, and more.
Headline vs Core
Headline inflation includes everything. Core inflation strips out food and energy because those prices swing wildly from month to month. Core inflation gives a clearer picture of the underlying trend.
Too Much or Too Little
Most central banks target around 2% inflation. Too high erodes purchasing power. Too low (or deflation) can cause people to delay spending, slowing the economy. The goal is stable, moderate inflation.
Related Concepts
Test Your Understanding
If inflation is 3% per year, what happens to the purchasing power of $100?