Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of a currency. Essentially, as inflation increases, each unit of currency buys fewer goods and services.

Inflation can be caused by various factors, such as increased demand for products and services (demand-pull inflation), rising production costs (cost-push inflation), or an increase in the money supply. Central banks, like the Federal Reserve in the U.S., often try to manage inflation through monetary policy, adjusting interest rates to either cool down an overheating economy or stimulate growth in a sluggish one.

In a moderate amount, inflation is considered normal and even beneficial for economic growth, as it encourages spending and investment. However, high or hyperinflation can be harmful, eroding savings and leading to economic instability. On the other hand, deflation, a decrease in the general price level, can also be problematic as it may lead to reduced consumer spending and further economic decline.