A sustained increase in the price level of goods and services in an economy over a period of time is known as inflation. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the price level of goods and services.

Inflation occurs when too much money is chasing too few goods and services. This excess demand for goods and services puts upward pressure on prices. Inflation can also occur when the government print new money.

Inflation is generally considered a bad thing because it erodes the purchasing power of money. As inflation goes up, every dollar you have buys less and less. This is why salary increases are generally tied to inflation rates – so that people can maintain their standard of living as prices go up.

However, there is such a thing as good inflation. Good inflation is when prices rise because the economy is doing well and there is more demand for goods and services. This kind of inflationary pressure is generally considered healthy for an economy.

How is inflation measured?

In the United States, inflation is measured by the Consumer Price Index (CPI), which is released monthly by the Bureau of Labor Statistics. The CPI measures the prices of a basket of goods and services that consumers commonly purchase.

The inflation rate is the percentage change in the CPI from one month to the next or year-over-year. For example, if the CPI were 100 in January and 101 in February, inflation would be 1%.

How to stop inflation?

The most common way to stop inflation is by raising interest rates. When interest rates go up, it becomes more expensive for people to borrow money, slowing down spending and reducing the amount of money chasing goods and services. This usually leads to a reduction in inflation.

Fiscal policy can also be used to fight inflation. If the government cuts spending or raises taxes, it will reduce the amount of money in the economy and help to stop inflation.

Monetary policy is usually the most effective way to stop inflation. This is when the central bank (like the Federal Reserve in the US) takes action to slow down the money supply. This makes it more expensive for banks to borrow money, which makes it more costly for people to borrow money. This slows down spending and inflation.