Inflation is the rate at which the general level of prices for goods and services in an economy rises over time, leading to a decrease in the purchasing power of money. In other words, as prices increase, each unit of currency buys fewer goods and services, reducing the value of money. Inflation is a natural economic phenomenon that occurs when demand for goods and services exceeds supply, production costs rise, or when there is an increase in the money supply. Central banks, such as the Federal Reserve in the United States, closely monitor inflation and implement monetary policies to manage it, aiming to keep inflation at a moderate and stable level.

The impact of inflation is felt by consumers, businesses, and investors alike. For consumers, inflation erodes purchasing power, meaning that the same amount of money will buy fewer goods and services over time. This can lead to a higher cost of living, particularly for essential items like food, housing, and healthcare. To protect against inflation, individuals may seek to invest in assets that tend to appreciate in value, such as real estate, stocks, or commodities, which can help maintain or increase wealth over time.

For businesses, inflation can lead to higher production costs, as the prices of raw materials, labor, and energy rise. These increased costs may be passed on to consumers in the form of higher prices, potentially reducing demand for products and services. Additionally, businesses may face challenges in maintaining profitability if they are unable to raise prices sufficiently to cover rising costs. For investors, inflation can impact the value of fixed-income investments, such as bonds, as rising inflation often leads to higher interest rates, which can reduce the market value of existing bonds. Understanding inflation and its effects is crucial for financial planning, investment strategy, and overall economic stability.