What Is Inflation in Economics?

Inflation measures how much the overall cost of living increases over time. When inflation occurs, each unit of currency buys fewer goods and services than before — so money loses value. It is usually expressed as an annual percentage; for example, 3% inflation means something that cost 100 last year costs 103 this year. Economists identify two main causes: demand-pull inflation, when demand for goods outpaces supply (too much money chasing too few goods), and cost-push inflation, when the cost of producing goods rises (such as higher wages or energy prices) and businesses pass those costs to consumers. Central banks, like the US Federal Reserve or the European Central Bank, typically target around 2% annual inflation — low and stable enough to encourage spending and investment while avoiding harmful extremes. Very high inflation (hyperinflation) can devastate an economy, as when prices in Zimbabwe or Weimar Germany doubled within days. Conversely, deflation (falling prices) can also be harmful, discouraging spending and deepening recessions.