Inflation
If you’ve ever talked with your parents or grandparents about the prices of goods when they were kids, you probably noticed a similar trend. $1 in the past was much more powerful than $1 is now. The purchasing power of the dollar was much higher. This is explained by inflation.
Inflation means the rising of prices over time. Over time, goods and services become more expensive—it’s just a natural part of an economy. As inflation rises, purchasing power decreases. One dollar becomes less powerful than it was before. It’s important to understand what causes inflation and how inflation affects the economy.
Study Tip: Inflation is the rising of prices over time and is measured by the Consumer Price Index (CPI).
We measure inflation through an index called the Consumer Price Index (CPI). This index tracks eight major groups of goods and services. If the prices of this generic group of goods and services increase every month, then inflation is increasing as well.
Along with inflation, there is hyperinflation, which is a rapid rate of inflation.