Inflation

Definition

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is commonly measured by the Consumer Price Index (CPI) or Producer Price Index (PPI).

5 Must Know Facts For Your Next Test

1. Inflation reduces the real value of money over time, affecting savings and investments.
2. Central banks, like the Federal Reserve, often adjust interest rates to control inflation.
3. Hyperinflation is an extremely high and typically accelerating inflation, leading to a rapid erosion of currency value.
4. Inflation can be caused by demand-pull factors, cost-push factors, or built-in inflation.
5. The Time Value of Money (TVM) concept accounts for inflation when calculating present and future values.

Review Questions

• How does inflation impact the purchasing power of money?
• What role do central banks play in controlling inflation?
• What are the primary causes of inflation?

Related terms

Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services.

Time Value of Money (TVM): A financial principle stating that money available now is worth more than the same amount in the future due to its potential earning capacity.

Interest Rates:

The cost of borrowing money or the return on invested funds, often adjusted based on inflation expectations.