Which of the following best describes 'inflation'?

The description of inflation as a general increase in prices and a fall in the purchasing value of money captures the essence of what inflation means in economics. When inflation occurs, the overall level of prices for goods and services in an economy rises, which means that each unit of currency buys fewer goods and services than it did before. This decrease in purchasing power is significant because it impacts consumers' ability to afford goods and services, as their income does not stretch as far when inflation is high.

The definition aligns with economic principles whereby inflation is measured through indices such as the Consumer Price Index (CPI), which reflects changes in the price level over time. A persistent increase in price levels often leads to a rise in costs of living, affecting savings, investments, and overall economic stability. Understanding this fundamental concept is crucial, as inflation can lead to wage-price spirals, affect monetary policy, and influence decision-making for both consumers and businesses.