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In [[economics]], '''inflation''' (or less frequently, '''price inflation''') is a general rise in the [[price level]] in an economy over a period of time.<ref>{{harvnb|Wyplosz|Burda|1997}} (Glossary)</ref><ref>{{harvnb|Blanchard|2000}} (Glossary)</ref><ref>{{harvnb|Barro|1997}} (Glossary)</ref><ref>{{harvnb|Abel|Bernanke|1995}} (Glossary)</ref>
When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the [[purchasing power]] per unit of money{{snd}}a loss of [[real versus nominal value (economics)|real value]] in the medium of exchange and unit of account within the economy.<ref>[http://www.sedlabanki.is/?PageID=195 Why price stability?] {{webarchive|url=https://web.archive.org/web/20081014031836/http://www.sedlabanki.is/?PageID=195 |date=October 14, 2008 }}, Central Bank of Iceland, Accessed on September 11, 2008.</ref><ref>Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429. "The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes that the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements."</ref> The opposite of inflation is [[deflation]], a sustained decrease in the general price level of goods and services. The common measure of inflation is the '''inflation rate''', the annualized percentage change in a general [[price index
Economists believe that very high rates of inflation and [[hyperinflation]] are harmful, and are caused by an excessive growth of the [[money supply]].<ref>Robert Barro and Vittorio Grilli (1994), ''European Macroeconomics'', Ch. 8, p. 139, Fig. 8.1. Macmillan, {{ISBN|0-333-57764-7}}.</ref> Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in [[real versus nominal value (economics)|real]] [[demand]] for goods and services, or changes in available supplies such as during [[scarcity|scarcities]].<ref>{{cite web|url=http://research.stlouisfed.org/fred2/series/MZMV|title=MZM velocity|access-date=September 13, 2014}}</ref> However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.<ref name="Mankiw 2002 pp=81–107">{{Harvnb|Mankiw|2002|pp=81–107}}</ref><ref>{{Harvnb|Abel|Bernanke|2005|pp=266–269}}</ref>
Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the [[opportunity cost]] of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of [[good (economics)|goods]] as consumers begin [[Hoarding (economics)|hoarding]] out of concern that prices will increase in the future. Positive effects include reducing [[unemployment]] due to [[nominal rigidity|nominal wage rigidity]],<ref>{{Harvnb|Mankiw|2002|pp=238–255}}</ref> allowing the central bank more leeway in carrying out [[monetary policy]], encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.
Today, most economists favor a low and steady rate of inflation.<ref name="econjournalwatch.org">Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007).[http://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists] p. 56</ref> Low (as opposed to zero or [[Deflation|negative]]) inflation reduces the severity of economic [[recessions]] by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a [[liquidity trap]] prevents [[monetary policy]] from stabilizing the economy.<ref name="aeaweb.org">"[http://www.aeaweb.org/articles.php?doi=10.1257/089533003772034934 Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others]" Lars E.O. Svensson, ''Journal of Economic Perspectives'', Volume 17, Issue 4 Fall 2003, pp. 145–166</ref> The task of keeping the rate of inflation low and stable is usually given to [[monetary authority|monetary authorities]]. Generally, these monetary authorities are the [[central bank]]s that control monetary policy through the setting of [[interest rate]]s, through [[open market operation]]s, and through the setting of banking [[reserve requirements]].<ref name=Taylor>{{Cite book |last = Taylor |first=Timothy |title=Principles of Economics |publisher=Freeload Press |date=2008 |isbn=978-1-930789-05-0}}</ref>
== History ==
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