inflation

A sustained, rapid increase in prices, as measured by some broad index (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to save.

There is no one single, universally accepted cause of inflation, and the modern economic theory describes three types of inflation: (1) Cost-push inflation is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral), (2) Demand-pull inflation results from increasing consumer demand financed by easier availability of credit; (3) Monetary inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits).

See also deflation and hyperinflation.

Inflation vs Deflation

Most of us don't stop to think about it, but the value of a dollar is always changing. It swings up and down with the financial fortunes of the United States. Sometimes a dollar is worth more than others, and sometimes it seems like a dollar is worth nearly nothing. The differences in the value of a dollar from one point to another are caused by inflation and deflation.

Inflation

When a dollar buys less than you would expect it to, we call that inflation. Inflation is caused by a variety of factors, but most of them are related to interest and debt. When the Federal Reserve bank raises interest rates, it causes the dollar to inflate. There is more money in the system, so every dollar is worth just a little bit less.

Deflation

Deflation is the opposite of inflation. When there are fewer dollars to go around, every one of them is worth more in terms of real goods and property.

Deflation comes about when interest rates are low, and when the economy is performing better than the rest of the world. Deflation makes it cheaper to buy things in the store, but companies who sell their products overseas often see a slowdown in sales.