Inflation is a general rise in prices across the economy. Inflation is a monetary event, and it is lagging in its effect. Inflation is a two-headed beast: A healthy economy requires a certain amount to stave off deflation (that is, the spiraling of prices amid low growth), but too much can really throw a wrench into things. Inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. Inflation is therefore a threat to all investments and savings.
Inflation
Inflation occurs when most prices are rising by some degree across the whole economy. Inflation may be understated, but much of the price pressure in commodities is due to real global economic growth and restricted supplies. Inflation has not been tamed--it is just calculated differently. inflation from cheaper manufactured imports and higher commodity prices has been small in either direction. Inflation is also used as an index for cost of living adjustments and as a peg for some bonds.
Prices
Prices of agricultural products and other commodities, metals and energy in particular, are going up even more sharply compared to manufactured goods. Prices rise too quickly because of the shortage of products, and inflation results. A similar definition of inflation can be found in Economics by Parkin and Bade: Inflation is an upward movement in the average level of prices. In other words, Price Inflation is when prices get higher or it takes more money to buy the same item. Because inflation is a rise in the general level of prices, it is intrinsically linked to money, as captured by the often heard refrain "Inflation is too many dollars chasing too few goods.
Money
A simple commonly used definition of the word inflation is simply "an increase in the price you pay or a decline in the purchasing power of money". Inflation is ultimately about money growth, and it is a reflection of too much money chasing too few products. It is simply a debasement of money via either money creation (excess supply) or lowered demand (devaluation). An enormous percentage of the profits of quotes companies goes to financial companies, which can only make money if interest rates are near zero or negative; as to non financial companies the story has been the internal carry trade, borrowing essentially for free in the USA and investing it to acquire foreign assets, from foreign stocks to building enormous amounts of capital intensive plants in India and China.
Inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. Inflation is the disease and rising prices are a symptom. Inflation is therefore a threat to all investments and savings.
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