Inflation and Deflation

• Inflation is a sustained increase in the average price level in an economy, making money less valuable over time.
• Deflation is a decrease in the average price level, resulting in negative inflation.
• Inflation can be caused by demand pull factors, such as increasing aggregate demand, or cost push factors, such as rising costs reducing aggregate supply.

Inflation is a sustained increase in the average price level in an economy, while deflation is a decrease in the average price level. Disinflation refers to a decrease in the rate of inflation. These measurements are based on the price of a typical basket of goods and services, which is used to create a price index such as the Consumer Price Index (CPI) or the Retail Price Index (RPI). Inflation can be caused by demand pull factors, such as increasing aggregate demand, or cost push factors, such as rising costs of production. Factors like higher wages can contribute to both demand pull and cost push inflation. It is important to understand these factors and their impact on the economy.