What does the term "inflation" refer to in economics?

The term "inflation" in economics refers specifically to a general increase in prices and a consequent fall in the purchasing value of money. This means that as prices rise, each unit of currency buys fewer goods and services than it did previously. Inflation indicates declining purchasing power, which can impact consumers' ability to buy the same amount of products as before without requiring more money.

This phenomenon often occurs when demand for goods and services exceeds supply or when production costs rise, prompting businesses to raise prices. Central banks may also influence inflation through monetary policy, adjusting interest rates to either encourage spending (which can lead to inflation) or to curb spending in order to control price levels.

Understanding this definition is crucial because it highlights the dual aspect of inflation: not only are prices going up, but the real value of money is decreasing, affecting economic decisions and overall economic well-being.