Inflation is the increase in the cost of goods and services in an economy. As that in turn means that each unit of the currency’s economy is worth less of any good or service, inflation can also be viewed as a devaluing of currency.
The opposite of inflation – when the cost of goods and services goes down, and each unit of currency therefore increases in value – is called deflation.
Keeping inflation levels consistent and in check is the remit of a central bank, who will generally work towards an inflation target. Inflation is usually measured using a consumer price index (CPI), which tracks the cost of a basket of consumer goods and services.
Changes in inflation can have a major impact on financial markets, as they affect purchasing power and can bring about change in a central bank’s monetary policy.