Inflation
Inflation changes the purchasing power of money, redistributes gains and losses across borrowers, lenders, workers and firms, and strongly influences monetary policy and financial-market expectations.
Definition
Inflation is a sustained increase in the general price level of goods and services, usually expressed as the percentage change in a broad price index over a specified period.
Measurement
Consumer price indices measure the changing cost of a representative consumption basket, while GDP deflators cover domestically produced final goods and services. Headline inflation includes all measured items; core measures exclude or statistically reduce volatile components to help identify persistent price pressure. Every measure depends on weights, quality adjustments, substitution assumptions and the population represented.
Drivers
Demand
- Household and business spending
- Fiscal stimulus
- Credit and financial conditions
Supply and costs
- Energy and commodity shocks
- Wages and productivity
- Supply-chain constraints
Expectations and institutions
- Price- and wage-setting behaviour
- Exchange-rate movements
- Policy credibility
Economic effects
| Channel | Effect | Distributional issue |
|---|---|---|
| Purchasing power | Nominal income buys fewer goods and services | Losses are larger when wages or benefits adjust slowly |
| Debt | Unexpected inflation reduces the real value of fixed nominal liabilities | Borrowers may gain at lenders' expense |
| Interest rates | Expected inflation is reflected in nominal yields | Cash and fixed-rate assets face differing exposures |
| Planning | Price uncertainty complicates contracts and investment | Firms with pricing power adjust more easily |
Important distinctions
Disinflation means inflation remains positive but slows; deflation means the general price level falls. A one-time price-level increase is not continuing inflation unless subsequent prices keep rising. Relative-price changes redistribute demand between products, whereas inflation describes a broad movement. Expected and unexpected inflation can produce very different contractual and distributional consequences.
Related concepts
Sources and further reading
View sources and editorial notes
- International Monetary Fund, inflation and monetary-policy resources.
- Bank for International Settlements, research on inflation dynamics.
- OECD, consumer price indices and methodological guidance.
Editorial note: Inflation experiences vary across households and businesses because their spending baskets, incomes, debts and pricing power differ. This entry is informational and does not provide economic or investment advice.