Economists use the term “inflation” to denote an ongoing rise in the general level of

prices quoted in units of money. The magnitude of inflation–the inflation rate–is usually
reported as the annualized percentage growth of some broad index of money prices. Inflation
thus means an ongoing fall in the overall purchasing power of the monetary unit….

The inflation rate is most commonly measured by the percentage rise in the Consumer
Price Index.

One of the concepts of economics most talked about by adults is inflation. Simply
put, inflation is a rise in prices relative to money available. In other words, you can get less for
your money than you used to be able to get… This means that, a high level of inflation affects the
entire economy.

The purpose of a price index is to summarize information on the prices of multiple goods
and services over time. Consumer spending accounts for about two thirds of the U.S. gross
domestic product (GDP). The Consumer Price Index (CPI) and the Personal Consumption
Expenditure deflator (PCE) are designed to summarize information on the prices of goods
purchased by consumers over time. In a hypothetical primitive society with only one good–say,
one type of food–we would not need a price index; we would just follow the price of the one
good. When there are many goods and services, however, we need a method for averaging the
price changes or aggregating the information on the many different prices. The rate of change of
prices–inflation–is important in both macro- and microeconomics…

There is one particular type of inflation that has devastating effects: hyperinflation.
Economists generally reserve the term hyperinflation to describe episodes where the monthly
inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost $1 on
January 1 would cost $130 on January 1 of the following year… Economies that present
hyperinflation are really unstable. Usually, the workers would get their payment twice a month
in order for them to use their money the best they could given the fact that their value was
decreasing fast. In some countries, like Germany after the First World War the employees would
receive their salary twice a day because of hyperinflation.

The oposite effect of inflation is deflation. That’s basically a decrease in the price level.
Still, the best situation for an economy is for the prices not to fluctuate as much, therefore
deflation isn’t the best option to seek.

Real inflation (the one that is damaging the economy) only occurs when the government
expanding the monetary mass. This is what economists call monetary inflation. Monetary
inflation is a sustained increase in the money supply of a country. The simple inflation can be
caused by a Consumer Confidence: When unemployment is low and wages are stable,
consumers are more confident and more likely to spend money. This confidence drives up prices
as manufacturers and providers charge more for goods and services that are in high demand or
Decreases in Supply: One of the basic causes of inflation is the economic principle of supply and
demand. As demand for a particular good or service increases, the available supply decreases.
When fewer items are available, consumers are willing to pay more to obtain the item.

Inflation has many negative effects. First, it erodes Purchasing Power. This effect is
obvious, given the definition. A higher inflation makes people pay more for the same good
because the purchasing power is decreasing. This is why inflation is a hidden for of taxation.
 A predictable response to declining purchasing power is to buy now, rather than later.
Cash will only lose value, so it is better to get your shopping out of the way and stock up on
things that probably won't lose value.

For consumers, that means buying more goods, food even if they don’e need it right now.
For businesses, it means making capital investments that, under different circumstances, might
be put off until later. Many investors buy gold and other precious metals when inflation takes
hold, but these assets' volatility can cancel out the benefits of their insulation from price rises,
especially in the short term.

One of the most intuitive effects is, of course, causing more inflation. Unfortunately, the
urge to spend and invest in the face of inflation tends to boost inflation in turn, creating a
potentially catastrophic feedback loop. As people and businesses spend more quickly in an effort
to reduce the time they hold their depreciating currency, the economy finds itself awash in cash
no one particularly wants. In other words, the supply of money outstrips the demand, and the
price of money – the purchasing power of currency – falls at an ever-faster rate.

In conclusion, inflation is a process that needs to be understood from its roots.

Economists, and people in general, need to find the causes first in order to understand the
meaning of it. Then, we need to understand the effect that inflation has over the entire economy
without forgetting that governments are usually the ones that inflate. Also, we have to keep in
mind that governments can somehow fake the number when it comes to inflation because of the
way it is calculated. The Consumer Price Index reffers to some goods that are relevant for the
state’s economy. If used the wrong good, the ones that people form that state don’t use as
frequently, the inflation value may be lower than it really is. So the best way to determine a
state’s economy stability is by looking at the effects, and not the numbers.