What does inflation refer to?

Inflation specifically refers to the overall increase in the price level of goods and services within an economy over a period of time. This phenomenon indicates that, on average, consumers need to spend more money to purchase the same amount of goods and services than they did in the past. It is often measured using indexes such as the Consumer Price Index (CPI) or the Producer Price Index (PPI).

Understanding inflation is crucial as it impacts purchasing power, influences monetary policy, and affects consumer behavior. When inflation is high, it can erode the value of money, meaning that consumers are able to buy less with the same amount of currency, which can influence both spending and saving behaviors across the economy. This makes the concept of inflation pivotal in economic discussions and policies, particularly those concerning interest rates and the supply of money in circulation.

Other aspects, such as employment rates, consumer spending, and international trade agreements, while interconnected within the economy, do not define inflation directly.