Inflation is the rise of the prices for goods and services over a period of time. What
inflation really mean is a loss in purchasing power, or a decline in the value of money.
When that general level of prices rise, currency buys fewer goods and services than
previously. Inflation causes a lot of different reactions in the economy. When there is
uncertainty in regards to future inflation, firms are discouraged from investing and saving
money because the future value is not known. The most common measure of inflation is
the consumer price index, or CPI for short. The CPI measures the changes in price levels
utilizing the prices of the market basket of goods and services collected each month.
(Inflation – The Economic Lowdown Podcast Series, Paragraph 4)
You might hear someone say that inflation is high in San Francisco because rents for
apartments are high, but this is not a correct use of the term inflation. Inflation refers not to
the level of prices, whether they are high or low, but to their percentage change. If rents are
high in San Francisco, but remain constant over a two year period, there would be no
inflation in rents during that time. (O’Sullivan, Sheffrin and Perez: Economics: Principles,
Applications and Tools, Page 132)
In the long run, inflation is considered a very good thing because the economy is growing
and supposed to be able to support the inflation. In the short and medium terms, inflation
