Inflation refers to the sustained rise in the general price level of goods and services over time, reducing the purchasing power of money. When prices increase, the same amount of money buys fewer goods, making inflation a crucial economic indicator for individuals, businesses, and policymakers. It reflects the overall cost of living and directly affects interest rates, savings, and investment decisions.

The most common ways to measure inflation are through indices such as the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). The CPI tracks price changes in goods and services consumed by households, while the WPI measures price changes at the wholesale level. A moderate level of inflation indicates a healthy and growing economy, but when inflation rises too quickly, it can erode real income and reduce the value of savings.

Types of inflation include demand-pull inflation, which occurs when demand exceeds supply; cost-push inflation, which happens when production costs increase; and structural inflation, caused by long-term economic changes. Central banks, such as the Reserve Bank of India (RBI), use monetary policy tools like repo rate adjustments to control inflation and maintain price stability within a target range. For India, the RBI aims to keep inflation around 4%, with a tolerance band of ±2%.

From an investment perspective, inflation plays a vital role in portfolio management. Investors often seek assets like equities, real estate, or inflation-linked bonds to protect their wealth from declining purchasing power. Understanding inflation helps individuals make informed financial decisions, plan long-term goals, and evaluate real returns on investments. Overall, inflation is a key measure of economic health that influences both personal finances and national monetary policy.