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What is Inflation?

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Inflation Definition. Inflation is a term that relates to a general rise in the price level of goods and services, measured by a price index, which leads to a decrease in the purchasing power of money. Central bank policies in most of today’s world have been expressly directed at minimizing “price inflation” and preventing the development of “Asset bubbles”. A subset of inflation is “Asset price inflation”. Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods. The best example is the housing market, which concerns almost every individual household, where house prices have over the past decade consistently risen by or at least near a two digit percentage, far above that of the consumer price index. This in turn, reduces, often substantially so, the disposable income of ordinary households, even in the absence of price inflation, but with the same outcome in the end. The Consumer Price Index, or CPI, is an index of the cost of all goods and services to a typical consumer. The chart below summarizes past history.

What is Inflation?


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