In economics, inflation or price inflation is a rise in the general level of prices of goods and services over a period of time. The term "inflation" originally referred to increases in the money supply (monetary inflation); however, debates regarding cause and effect have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of moneya loss of purchasing power. When the general level of prices rises, each unit of currency buys fewer goods and services. Price inflation is usually measured by calculating the inflation rate, which is the percentage change in a price index, such as the consumer price index.

Inflation causes certain adverse effects in the economy. For example, uncertainty about future inflation may discourage investment and saving. Inflation also shifts income from those on fixed incomes to those with variable incomes. Fixed nominal payments (e.g. rents and wages) are eroded if they are not inflation-adjusted. High inflation may cause hoarding by households as they buy consumer durables as stores of wealth.

Economists generally agree that high rates of inflation and hyperinflation are caused by high growth rates of the money supply. Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity) and sometimes to changes in the money supply (i.e. the amount of units of currency). However, there is general consensus that in the long run, inflation is caused by money supply increasing faster than the growth rate of the economy.

Most central banks (who control money supply) are tasked with keeping inflation at a low level. There are a number of methods that have been suggested to control it. Inflation can be affected to a significant extent through setting interest rates and through other central bank actions (that is, through monetary policy). Others advocate fighting inflation by fixing the exchange rate between the currency and some other reference currency, such as the Euro, U.S. dollar or gold (see fixed exchange rate). Another method attempted in the past has been wage and price controls (incomes policies).

Origins

Inflation originally referred to the debasement of the currency, where gold coins were collected by the government (e.g. the king or the ruler of the region), melted down, mixed with other metals (e.g. silver, copper or lead) and reissued at the same nominal value. By mixing gold with other metals, the government could increase the total number of coins issued using the same amount of gold, and thus gained a profit known as seigniorage. However, this action increased the money supply, and lowered the relative value of money. As the real value of each coin had decreased, the consumer had to pay more coins in exchange for goods and services of the same value (i.e. prices had increased). In the 19th century, the word inflation started to appear as a direct reference to the action of increasing the amount of currency units by the central bank.Michael F. Bryan, "On the Origin and Evolution of the Word 'Inflation'" Classical political economists from Hume to Ricardo did distinguish between and debate the cause and effect: the Bullionists, for example, argued that the Bank of England had over-issued banknotes (over-increased the money supply) and caused 'the depreciation of banknotes' (price inflation).