What is Inflation? Definition, Meaning & Example
The sustained increase in the general price level of goods and services in an economy over time.
TL;DR: The sustained increase in the general price level of goods and services in an economy over time.
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Inflation: The sustained increase in the general price level of goods and services in an economy over time.
Explanation
Inflation means the purchasing power of money decreases; the same amount of money buys fewer goods over time. Moderate inflation of 2-3% annually is considered healthy for an economy, but high inflation hurts the poor the most as their savings lose value. The Reserve Bank of India uses tools like adjusting interest rates to control inflation. India has experienced high inflation, particularly in food and fuel prices. Understanding inflation is important for making financial decisions like savings and loans. When inflation rises, the real value of savings decreases unless interest rates on savings exceed the inflation rate.
Example
If a pen costs 10 rupees today and inflation is 10% per year, the same pen will cost approximately 11 rupees next year. Money becomes worth less.
Frequently Asked Questions
Who is hurt most by inflation?
Poor people and those on fixed incomes are hurt most because their purchasing power decreases and they cannot easily increase their income.
How does inflation affect loans and savings?
High inflation reduces the real value of savings. Borrowers benefit if they repay loans with money that is worth less, but savers lose.
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