Inflation is an increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power of money. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.
Inflation can be caused by a variety of factors, including an increase in the money supply, an increase in government spending, and an increase in global commodity prices. It can also be caused by an increase in production costs, such as wages or raw materials. Central banks, such as the Federal Reserve in the United States, attempt to control inflation through the use of monetary policy, which involves adjusting interest rates and the supply of money in the economy.
Inflation is generally considered to be a negative economic phenomenon, as it can lead to a decrease in the value of savings, an increase in uncertainty, and a misallocation of resources. However, low levels of inflation, generally defined as an inflation rate of 2% or lower, are generally considered to be beneficial for economic growth.