Inflation Basics Defined In One Lesson

Understanding this will help cut through a lot of noise.

Inflation is a rise in the general price level. It is NOT a rise in any single good or service’s price. It is NOT a rise in a group of prices. It is a rise in ALL prices averaged together.

The averaging is one of the devils in the details since determining “average” can reasonably vary considerably. There are many, many versions of this. We can leave that for another day.

Inflation is the rate of change. If it is negative, we call it deflation.

Mathematically speaking, inflation is the first derivative. A change in inflation, change in the rate of change, is the second derivative. If inflation is accelerating, we simply say inflation is increasing. If inflation is decelerating, we call it disinflation—but in that case prices are still rising. This trips a lot of people up.

Here is a hypothetical illustration that may help:

In the illustration I term it “price”, which may unfortunately be misleading from what I wrote above. Don’t confuse this labelling as being any single price. Assume it is the weighted-average price across a representative basket of goods and services. Technically, this is done as a price level in index terms, but it is clearer I think to show it in a more familiar dollar price terminology.