Inflation is a sustained increase in the general (average) price level across an economy over time — not just one product getting more expensive, but a broad, ongoing rise across most goods and services. As prices rise, each individual dollar buys less than it did before, meaning inflation directly erodes purchasing power — the same paycheck buys fewer groceries, less gas, and so on, even if the paycheck's dollar amount hasn't changed at all.

The Consumer Price Index (CPI) is the standard tool for actually measuring inflation: it tracks the average change over time in the prices paid by consumers for a fixed 'basket' of representative goods and services (housing, food, transportation, medical care, and more), and the percentage change in CPI from one period to the next is the most commonly cited inflation rate.

Inflation doesn't affect everyone equally: people on fixed incomes (like retirees with a fixed pension) are hurt the most, since their income doesn't automatically rise with prices, while borrowers with fixed-rate debt can actually benefit, since they're repaying their loan with dollars that are worth less than when they originally borrowed them. Unexpected or highly volatile inflation is especially damaging, since it makes long-term financial planning and contracts far less reliable.

Because inflation erodes purchasing power and creates broader economic uncertainty, controlling it is one of the Federal Reserve's core mandates, directly connecting to the Monetary Policy lesson — the Fed typically raises interest rates specifically to fight rising inflation, cooling down spending and borrowing across the economy to bring price growth back toward its target rate.