What inflation actually is
A rise in the general price level. Not the price of one thing going up, and not the same as things being expensive.
Inflation is a sustained rise in the general level of prices. Two words in that sentence do a lot of work: general, and sustained.
One price is not inflation
If tomatoes double because of a bad harvest, tomatoes got expensive. Inflation is what happens when the whole basket moves, which is why it is measured with a basket rather than an item. See what CPI measures.
The distinction people miss most
Inflation is a rate of change. If it drops from 6% to 3%, prices are still rising — just more slowly. Prices only fall when the rate goes below zero, which is deflation and is rare. This is why “inflation is coming down” and “nothing feels cheaper” are both true at once, and it causes more confusion than any other point in economics.
- Inflation. Prices rising.
- Disinflation. Prices rising more slowly than before.
- Deflation. Prices falling.
Why a little is the target and none is not
Most central banks target a low positive rate rather than zero. Deflation encourages people to delay purchases, since waiting makes things cheaper, and delayed spending reduces activity, which reduces prices further. That loop is harder to escape than mild inflation, so a small buffer above zero is deliberate.
Where it comes from
- Demand. More money chasing the same goods.
- Supply. A shock — energy, shipping, a harvest — raising costs that feed through into prices.
- Expectations. If people expect prices to rise, they ask for higher wages and set higher prices, which makes it happen. This one is self-fulfilling, and it is the reason central banks care so much about being believed.
A central bank that is believed when it says it will control inflation has an easier job, because expectations do some of the work. One that is not believed has to act far more aggressively to achieve the same result.