Inflation refers to the general increase in prices of goods and services over time, leading to a decrease in the purchasing power of a currency. This means that the same amount of money will buy fewer goods and services as time goes on. Inflation can be caused by various factors such as increased demand, supply shortages, or changes in government policies.

The effects of inflation can be felt by individuals, businesses, and the overall economy. For individuals, inflation erodes the value of savings and fixed incomes, making it more difficult to afford the same standard of living. Businesses may face higher production costs and may have to increase prices, leading to reduced consumer purchasing power. Inflation can also impact the economy by reducing the value of investments and leading to uncertainty in financial markets.

For example, if the inflation rate is 3% per year, a $100 item will cost $103 in the following year. Over time, this can significantly impact the affordability of goods and services.

Understanding inflation is important for making informed financial decisions and for policymakers to implement appropriate monetary and fiscal policies to manage inflation rates.

References:

• Investopedia - Inflation: https://www.investopedia.com/terms/i/inflation.asp
• Federal Reserve Bank of St. Louis - What Is Inflation?: https://www.stlouisfed.org/in-plain-english/what-is-inflation