Inflation (from Latin inflatio “enfolding, swelling,” derived from inflāre “to inflate”) in economics, refers to the prolonged increase in the general average level of prices of goods and services over a given period of time, which generates a decrease in the purchasing power of money. Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation does not refer to a change in relative prices. A relative price change occurs when you see that the price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means that there is pressure for prices to rise in most markets in the economy. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one.

Inflation resulting from rising commodity prices or rising prices of agricultural products is referred to as agflation.

As prices rise, each monetary unit will be able to buy fewer goods and services. Consequently, inflation is also (ceteris paribus, that is, considering all other conditions, including incomes, unchanged) an erosion of consumer purchasing power.

Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped, then it would not be inflation anymore. Inflation has consequences for people and firms throughout the economy, in their roles as lenders and borrowers, wage-earners, taxpayers, and consumers.

Tracking Inflation

Economists measure the price level by using a basket of goods and services and calculating how the total cost of buying that basket of goods will increase over time. Economists often express the price level in terms of index numbers, which transform the cost of buying the basket of goods and services into a series of numbers in the same proportion to each other, but with an arbitrary base year of 100. We measure the inflation rate as the percentage change between price levels or index numbers over time.

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