What is inflation?

Inflation refers to a general increase in prices combined with a decline in the purchasing power of money. This phenomenon occurs when the overall level of prices for goods and services rises, implying that consumers will need more money to buy the same quantity of items over time. As inflation progresses, each unit of currency buys fewer goods and services, leading to a decrease in the value of money.

Understanding this concept is essential for comprehending how economies function. For instance, central banks often monitor inflation rates to make decisions regarding monetary policy, aiming to control inflation to promote stable economic growth.

The other choices relate to different economic concepts. A decrease in overall economic activity over time may point to a recession, which is not the same as inflation. The measure of the total value of goods and services produced describes Gross Domestic Product (GDP), while a rapid increase in the stock market pertains to stock market performance, which can be influenced by various factors, including investor sentiment and economic indicators, but does not inherently define inflation.