Inflation is a key concept in macroeconomics, and a major concern for government policymakers,

companies, workers and investors. Inflation refers to a broad increase in prices across many goods and
services in an economy over a sustained period of time. Conversely, inflation can also be thought of as
the erosion in value of an economy's currency (a unit of currency buys fewer goods and services than in
prior periods).

In the United States, the Consumer Price Index (CPI) is among the most commonly-used measures of
inflation. The CPI uses a so-called "market basket" of goods to measure the changes in prices
experienced by average consumers in the economy. Economists and central bankers will often subdivide
the CPI into so-called "core inflation," a measure that excludes the price of food and energy.

The Producer Price Index (PPI) is a measure of inflation that tracks the prices that producers obtain for
their goods. Though a long-followed economic statistic, the change in composition of some economies
away from manufacturing and towards services is eroding the value of this statistic. (To learn more
about inflation and its indicators, check out Using Coincident And Lagging Indicators.)

The GDP deflator is another option for measuring prices and inflation. As the name suggests, the GDP
deflator is a price measurement tool that is used to convert nominal GDP to real GDP. The GDP deflator
is a broader measure than the CPI, as it includes goods and services bought by businesses and
governments.

While there is little consensus on the "right" rate of inflation for an economy (or even if inflation is
necessary at all), there is little disagreement in the differing impacts of expected and unexpected
inflation. When inflation is expected, agents in the economy can plan for it and act accordingly
businesses raise prices, workers demand higher wages, lenders raise interest rates and so on.

Unexpected inflation is considerably more problematic. When inflation is higher than expected, it tends
to hurt workers, recipients of fixed incomes, and savers. In contrast, unexpected inflation often benefits
companies (who can raise prices quickly without needing to raise wages in tandem) and borrowers (who
can repay their debts with money that is now worth less than when they borrowed it).

Over the long term, unanticipated inflation can cause a number of problems for an economy. Businesses
will invest less in long-term projects because of the uncertainty of returns, price information becomes
distorted, and consumers will spend more time trying to protect themselves from inflation and less time
engaging in productive activities. Periods of inflation also tend to redirect investment from businesses
and toward hard assets, thus depriving companies of the capital they need to grow and expand.
Causes of Inflation

There is no single theory for the cause of inflation that is universally agreed upon by economists and
academics, but there are a few hypotheses that are commonly held.

Demand-Pull Inflation Inflation is caused by the overall increase in demand for goods and services,
which bids up their prices. This theory can be summarized as "too much money chasing too few goods".
In other words, if demand is growing faster than supply, prices will increase. This usually occurs in
rapidly growing economies. This theory is often promoted by the Keynesian school of economics.

Cost-Push Inflation Inflation is caused when companies' costs of production go up. When this happens,
they need to increase prices to maintain their profit margins. Increased costs can include things such as
wages, taxes, or increased costs of natural resources or imports.

Monetary Inflation Inflation is caused by an oversupply of money in the economy. Just like any other
commodity, the prices of things are determined by their supply and demand. If there is too much supply,
the price of that thing goes down. If that thing is money, and too much supply of money makes its value
go down, the result is that the prices of everything else priced in dollars must go up! This theory is often
promoted by the Monetarist school of economics.

Costs of Inflation

Inflation affects different people in different ways, with some benefiting from its effects at the expense
of some who lose out. It also depends on whether changes to the rate of inflation are anticipated or
unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated
inflation), then we can compensate and the impact isn't necessarily as severe. For example, banks can
vary their interest rates and workers can negotiate contracts that include automatic wage hikes as prices
go up.

Here is a brief account of the typical winners and losers from inflation:

Creditors (lenders) lose and debtors (borrowers) gain under inflation. For example, suppose a
bank issues you a 30-year mortgage to buy a house at a fixed interest rate of 5% per year,
costing $1,000 per month. As inflation rises, the cost of that $1,000 per month decreases,
which benefits the homeowner, especially if the rate of inflation exceeds the interest rate on the
loan.
Inflation hurts savers since a dollar saved will be worth less in the future. Unless the money is
saved in an account that pays an interest rate at or above the rate of inflation, the purchasing
power of savings will erode. This phenomenon is sometimes called "cash-drag."
Workers with fixed salaries or contracts that do not adjust with inflation will be hurt as the
buying power of their incomes stay the same relative to rising prices.
Similarly, people living off a fixed-income, such as those below the poverty line, retirees
or annuitants, see a decline in their purchasing power and, consequently, their standard of
living.
Landlords benefit, if they have a fixed mortgage (or no mortgage) as they are able to raise the
rent more each year.
 Uncertainty about what will happen next makes corporations and consumers less likely to
spend. This hurts economic output in the long run.
The entire economy must absorb repricing costs (menu costs) as price lists, labels, menus and
more have to be updated.
If the domestic inflation rate is greater than that of other countries, domestic products become
less competitive.

Variations on the Theme of Inflation

There are several variations on the theme of inflation.

Deflation is when the general level of prices are falling. It is the opposite effect of inflation. Deflation
tends to occur more rarely and for shorter periods of time than inflation. Deflation occurs typically
during times of recession or economic crisis and can lead to deep economic crises including depression.
The reason for this is the so-called deflationary spiral: when prices are going down, why would you
spend your money today, when each dollar will be more valuable tomorrow? And why spend tomorrow
when each dollar can buy more the day after? The result is that people stop spending and hoard their
money in anticipation of prices falling even further. If money is being hoarded, it isnt being spent, so
business profits collapse and people are laid off. Increasing unemployment leaves the economy with
even less spending, and the spiral continues.

Disinflation is a condition where inflation is still positive, but the rate of inflation is decreasing for
example from +3% to +2%.

Hyperinflation is unusually rapid inflation, typically more than 50% in a single month. In extreme cases,
this inflation gone awry can lead to the breakdown of a nation's monetary system or even its economy.
One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose
2,500% in one month! Likewise, in Zimbabwe, hyperinflation led to Z$100 trillion bills being printed that
were worth only a few U.S. dollars. Hyperinflations have also famously occurred in Hungary and
Argentina in the 20th century.

Stagflation is the rare combination of high unemployment and economic stagnation along with high
rates of inflation. This happened in industrialized countries during the 1970s, when a rocky economy
was confronted with OPEC raising oil prices resulting in a demand shock for oil. This sent the price of oil
and all of the products and services that use oil as an input higher, even as the economy slackened.

People often complain when prices go up, but they often ignore the fact that wages should be rising as
well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than
your wages. A modest inflation is a sign that an economy is growing. In some situations, little inflation
can be just as bad as high inflation. The lack of inflation may be an indication that the economy is
weakening. As you can see, it's not so easy to label inflation as either good or bad it depends on the
overall economy as well as your personal situation