inflation
Definition
Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in the purchasing power of money. It occurs when demand outpaces supply or when production costs increase.
Analogy
Imagine inflation as a balloon that expands as you fill it with air—the balloon represents the economy, and the air symbolizes money. As more air goes into the balloon (more money circulates in the economy without a corresponding increase in goods and services), it stretches and grows larger (prices rise). Just as a fully inflated balloon holds less value to someone who already has many balloons (your dollar buys less as prices rise), so does money during inflation.
Related terms
Purchasing Power: The amount of goods and services that can be bought with a unit of currency; it decreases as inflation rises.
Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, often used to assess inflation.
Hyperinflation: An extremely high and typically accelerating inflation rate, often causing rapid erosion of a country's currency's true value
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