Inflation (Encyclopedia of Business and Finance)    • (SEE:
Economic Cycles)  Inflation (Encyclopedia of Business)
Inflation is commonly understood as an increase in the price
level. Formally, it is defined as the rate of change in the
price level. Thus, an inflation rate of 5 percent per annum
means that the price level is increasing at the rate of 5
percent. Inflation, however, need not always be positive. It
could be a negative number, in which case the price level would
be declining. Of course, a negative inflation rate, termed
deflation, is very uncommon. Most economies face positive rates
of inflation year after year.  If the inflation rate is positive
and an individual's income remains constant, his or her real
standard of living will fall as the individual's income will be
worth less and less in successive periods. Let us assume that a
household earns $50,000 per year and the income remains fixed at
this level in the future. If the inflation rate persists at 10
percent per year, the purchasing power