The basic inflation meaning is a general rise in the prices of goods and services across an economy over time, so that a rupee or a dollar stretches a little less far than it did before. If a basket of groceries cost 500 last year and 530 now, inflation has been at work.
A second, physical sense survives as well: filling something with air or gas, like a balloon or a tyre. This page focuses on the money sense, gives a plain definition of inflation, walks through a simple calculation and explains the terms that travel with it.
Entry at a glance
Meaning
Rising general price level; falling buying power of moneyPart of speech
Noun (uncountable in the economic sense)Pronunciation
in-FLAY-shunWord forms
inflate (verb), inflationary (adjective), inflatedOrigin
Latin inflatio, a blowing into; money sense recorded in American English in 1838Opposite
Deflation (a general fall in prices)Register
Neutral; common in news, finance and school economics
Definition of inflation in simple words
To define inflation, think about the price level, the average price of the things households buy. Inflation is when that average keeps climbing. One item getting dearer, such as onions after a poor harvest, is not inflation on its own. Inflation means prices are rising broadly, across food, rent, transport, fees and more.
The flip side is purchasing power. When prices rise 5 percent in a year, the same salary buys about 5 percent less, unless pay rises too.
Inflation meaning with a worked example
Economists track a fixed basket of common purchases. Suppose the basket cost 1,000 last year and 1,060 this year.
- Find the change: 1,060 minus 1,000 is 60.
- Divide by the old cost: 60 divided by 1,000 is 0.06.
- Turn it into a percentage: 0.06 is 6 percent.
So the inflation rate is 6 percent. In India, a widely watched measure is the Consumer Price Index, published by the government's statistics office. The US also publishes a Consumer Price Index, along with other price measures.
Why inflation happens
Economists usually describe a few main causes:
- Demand pull: people and businesses want to buy more than the economy can produce, so sellers raise prices.
- Cost push: making things gets costlier, for example when fuel or wages rise, and firms pass the costs on.
- Expectations: if everyone expects prices to rise, workers ask for more pay and shops raise prices early, which can keep the cycle going.
A lot of money chasing the same goods can also add to it. Central banks, such as the Reserve Bank of India and the US Federal Reserve, aim to keep inflation low and steady, mainly by raising or lowering interest rates.
The word itself: inflate, inflated, inflationary
The noun comes from Latin inflatio, a puffing up, from inflare, to blow into. Its first English uses were about swelling and air. The money sense is first recorded in American English in 1838, when it described an increase in the money in circulation; later it came to mean the rise in prices itself.
Related forms keep both senses alive. You inflate a tyre, but critics may say a company inflated its figures, and an inflationary policy is one likely to push prices up. You also hear grade inflation for marks that keep rising without better work.
Sentences with inflation
- Food inflation hit families hardest because groceries take up a big share of their budget.
- The union asked for a raise that at least matched inflation.
- Savers lose out when bank interest is lower than inflation.
- Please check the tyre inflation before the long drive.
For more money words, such as budget, tariff and annuity, see the business and finance terms section.
Frequently asked questions
What is the definition of inflation in economics?
Inflation is a sustained rise in the general level of prices in an economy. As a result, each unit of currency buys fewer goods and services. It is usually measured as a yearly percentage.
Is inflation good or bad?
Low, steady inflation is usually seen as normal in a growing economy, and many central banks aim for it. High or unpredictable inflation hurts savers and people on fixed incomes. Economists debate the best level for each country.
What inflation rate does India aim for?
The Reserve Bank of India works under a target of 4 percent consumer price inflation, with a tolerance band of 2 to 6 percent. The US Federal Reserve aims for 2 percent over time, using a different price measure.
What is the opposite of inflation?
Deflation, a general fall in prices, is the opposite. It may sound pleasant, but long deflation can lead people to delay spending, which can slow the economy.
How do you pronounce inflation?
It is in-FLAY-shun, with the FLAY part strongest. The verb inflate is in-FLAYT.
Does inflation mean my savings lose value?
If your savings earn less interest than the inflation rate, their buying power shrinks over time. That is why people compare interest rates with inflation.