Inflation Definition

There is not a set inflation definition recognized by all governments and financial institutions as the sole definition. Most people have heard the term "inflation" before, whether on the television, radio or just general conversation. But what does inflation really mean?

Definition The U.S. Bureau of Labor Statistics' definition of inflation is "the overall general upward price movement of goods and services in an economy." However, this simple definition doesn't provide the full explanation for what people mean when they say "inflation." As time goes on, the price of goods necessarily increases. Obviously, the average price of a gallon of milk in the 1950s is less than the cost of a gallon of milk today. However, in a healthy economy, consumers are able to continue buying the item because average wages increase over time and their money retains its value. Inflation is bad when the prices of goods and services increases faster than consumers can keep up. Inflation can be measured by data such as the U.S. Bureau of Labor Statistics' Consumer Price Index (CPI), which shows prices paid by consumers for various goods and services on a monthly basis. Inflation is bad when the prices of goods and services increase faster than consumers' buying power. 

Causes Inflation can be caused by combination of multiple factors. It can be caused by an increase of currency in circulation while the amount of goods remains the same. The increase in currency leads to increased demand which results in businesses raising their prices. Eventually, the currency's purchasing power is reduced. This is known as monetary inflation. Inflation can also be caused by stagnant wages, when people's wages don't increase in line with the costs of goods. A reduction in the supply of goods, because of events such as war and natural disasters, also drives up prices.