Inflation is the sustained increase in the general price level of goods and services over time, reducing the purchasing power of money. Understanding inflation is fundamental to macroeconomics and economic policy.
Defining Inflation Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services — in other words, the purchasing power of money falls. Inflation is measured most commonly by the Consumer Price Index (CPI), which tracks the price changes of a representative basket of goods and services bought by typical households. In the UK, the Retail Price Index (R