What does inflation represent in an economy?

Inflation represents an increase in the overall level of prices in an economy, which can affect the purchasing power of money. This process is typically measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track changes in the prices of a basket of goods and services over time. When inflation occurs, it indicates that, on average, the prices for goods and services are rising, which means consumers or businesses will need to spend more money to purchase the same items they could buy previously for less. This phenomenon can stem from various factors, including increased demand for goods and services, higher production costs, or expansionary monetary policies. Understanding inflation is crucial for businesses and policymakers as it impacts economic decisions, savings, investments, and interest rates.