What is inflation?

Inflation refers specifically to the rate at which the general level of prices for goods and services rises over time. This concept is crucial in economics as it affects purchasing power, cost of living, and economic policy. When inflation occurs, each unit of currency buys fewer goods and services, indicating a decrease in the currency's purchasing power.

Understanding inflation is essential for both consumers and businesses, as it can influence interest rates, wage negotiations, and overall economic growth. Economists monitor inflation through various indices, most notably the Consumer Price Index (CPI), which tracks changes in the prices of a basket of goods and services over time.

In contrast to the other options, the correct definition captures the essence of inflation as a rising price phenomenon rather than a stability or decrease in prices. Recognizing this distinction is vital for comprehending how inflation impacts economic conditions and monetary policy decisions.