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Definition of 'Inflation'

Inflation refers to the rate at which the general price level of goods and services in an economy increases over a period of time. In other words, it's a measure of the decrease in the purchasing power of money. When inflation occurs, the cost of goods and services goes up, which means that each unit of currency can buy fewer goods and services than before.

Inflation is typically measured using the consumer price index (CPI), which tracks the prices of a basket of goods and services that are commonly purchased by consumers. A higher CPI indicates a higher rate of inflation, while a lower CPI indicates a lower rate of inflation.

Inflation can be caused by a variety of factors, including an increase in the money supply, a decrease in the supply of goods and services, or an increase in demand for goods and services. High inflation can have a number of negative effects on an economy, including reducing the value of savings, reducing purchasing power, and increasing the cost of borrowing.

Central banks and governments often work to manage inflation through policies such as adjusting interest rates or controlling the money supply. Managing inflation can be a delicate balancing act, as too little inflation can lead to stagnation and too much inflation can lead to instability and economic downturns.

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