What does inflation measure?

Inflation measures the rate at which prices of goods and services increase over a specific period. It reflects the change in purchasing power and the cost of living. When inflation occurs, each unit of currency buys fewer goods and services, indicating a decrease in the value of money.

Inflation is usually quantified using price indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track changes in prices over time. A higher inflation rate implies that consumers are paying more for the same goods and services than they did in the past. This concept is pivotal in economics, as it influences monetary policy, interest rates, and overall economic stability.

Other options do not properly define inflation: the decrease in workforce participation relates more to employment metrics, the rise in GDP pertains to economic growth rather than price changes, and the amount of currency in circulation affects the economy but is not a direct measure of inflation itself.