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Inflation

Definition

Inflation refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money.

Analogy

Imagine you have a jar of cookies, and every day someone adds more cookies to the jar. As the number of cookies increases, each cookie becomes less valuable because there are more of them. This is similar to how inflation works - as the supply of money increases, its value decreases.

Related terms

Deflation: Deflation is the opposite of inflation. It refers to a decrease in prices over time, resulting in an increase in the purchasing power of money.

Consumer Price Index (CPI): CPI measures changes in the average price level of goods and services purchased by households. It helps track inflation rates.

Hyperinflation: Hyperinflation is an extremely high and typically accelerating inflation. It occurs when prices rise rapidly, causing people to lose confidence in their currency.



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© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.