Inflation is a macroeconomic concept that refers to the general increase in prices of goods

and services in an economy over a period of time, leading to a decrease in the purchasing
power of money. In other words, inflation represents the erosion of the real value of money,
as it takes more currency to buy the same amount of goods and services.

Inflation is typically measured using various indices, such as the Consumer Price Index (CPI)
or the Producer Price Index (PPI), which track the average change in prices of a basket of
goods and services consumed by households or produced by businesses, respectively. These
indices provide insights into the rate at which prices are rising across different sectors of the
economy.

Several factors can contribute to inflation, including:

1. Demand-Pull Inflation: This occurs when demand for goods and services exceeds supply,
leading to upward pressure on prices. Increased consumer spending, expansionary monetary
policies (such as lowering interest rates or increasing money supply), or government stimulus
programs can contribute to demand-pull inflation.

2. Cost-Push Inflation: This occurs when production costs, such as wages, raw materials, or
energy prices, rise, leading to higher prices for finished goods and services. Factors such as
supply chain disruptions, increases in labor costs, or rising commodity prices can contribute
to cost-push inflation.

3. Built-In Inflation: Also known as wage-price inflation, this occurs when workers demand
higher wages to keep up with rising prices, leading to a cycle of increasing wages and prices.
When businesses pass on higher labor costs to consumers through higher prices, it can
contribute to sustained inflationary pressures.

Inflation is often categorized into different types based on its magnitude and duration:

- Moderate Inflation: A moderate and steady increase in prices, typically within a range of 2-
3% annually, which is considered conducive to economic growth and stability.
- Hyperinflation: An extreme form of inflation characterized by very rapid and out-of-control
increases in prices, often exceeding hundreds or thousands of percent annually.
Hyperinflation can have severe economic and social consequences, including currency
devaluation, loss of confidence in the monetary system, and economic instability.
- Deflation: The opposite of inflation, deflation refers to a sustained decrease in the general
price level of goods and services. While falling prices may initially seem beneficial to
consumers, deflation can lead to reduced consumer spending, lower investment, and
economic stagnation.

Central banks and governments often implement monetary and fiscal policies to manage
inflation and maintain price stability. These policies may include adjusting interest rates, open
market operations, fiscal stimulus measures, and supply-side reforms aimed at addressing
underlying factors contributing to inflationary pressures. Central banks typically target a
specific inflation rate as part of their monetary policy objectives, aiming to achieve price
stability while supporting sustainable economic growth.