Definition & Meaning:

'Inflation' basically means the decreasing value of money (you can buy less with the same quantity of money). For example, can you buy the same quantity of things in a supermarket for $10 today as you could in 2000? No you can't. In general, prices are higher today than they were in 2000. This is 'inflation'.

But what things cause 'inflation'?

From my limited understanding of the topic, it would seem that many factors cause the general level of prices to rise:

More Demand:

One of the main factors in deciding how much to sell a commodity (e.g. oil, copper etc...), product or service at is the level of demand there is to buy it. The higher the demand for it, the more a company can sell it for. This explains why in a recession the level of inflation is lower than in a boom (because there is less demand).

More People:

As the world's population continues to grow, there is more demand for commodities, products or services because there are more people who need/want to buy/consume them. This explains why throughout history inflation continuously occurs.

Government Action:

Governments can cause inflation and affect its level in two ways: directly affecting the prices of products and increasing the amount of money there is in the economy. The first way is by increasing or decreasing the rate of taxes, the rate of interest to borrow money or the level of government spending in the economy. This can both directly and indirectly affect the prices of products/services and the level of demand there is for them.

The second way is by changing the amount of money there is in the economy. By increasing the supply of money (by printing more), it means the value of it decreases. This causes prices to rise (because money is worth less).

All of the above factors help to explain why both inflation happens and why the level/rate of it changes overtime. But how can we measure the level/rate of inflation?

To measure this decrease in the purchasing power of money (another way to say value of money), they use the inflation rate. Economists generate the inflation rate by comparing the change in prices of a group of goods/products and services over time.

The opposite of 'inflation' (when the value/purchasing power of money increases) is called 'deflation'.

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