Q. What is Inflation?

Inflation between two points in time is defined as percentage increase of price index between these two points in time. 

Comments:

• Price index is calculated at a certain point in time, inflation over a time period, characteristically one year
• Inflation may just as well be defined as percentage change in the price level.
• Inflation is independent of which year we use as our base year for our price index.
• Youfrequently hear that inflation is 'percentage change in prices'though keep in mind that 'prices' is then short for the price level.
• Becausethe price level may be defined in several different ways (using different goods and different weights in the basket), inflation can be defined in several different ways.
• if the price index reduces between two points in time we say that inflation is negative or that we have deflation.