What does inflation refer to in economic terms?

Inflation in economic terms refers to a general increase in prices across an economy over a period of time. This concept is critical to understanding how currency value, purchasing power, and overall economic conditions interact. When inflation occurs, each unit of currency buys fewer goods and services, leading to a decrease in the purchasing power of money.

The measure of inflation is often represented by various indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track changes in price levels. Understanding inflation is essential for policymakers, businesses, and consumers, as it influences decisions related to spending, saving, and investment.

While the other options relate to economic concepts, they do not accurately define inflation. For example, a temporary price drop or a steady decrease in wages describes deflation or wage depreciation rather than an increase in prices. Similarly, a decline in overall economic activity pertains to recessionary conditions but does not encompass the definition of inflation itself.