Inflation rate - Definition and Overview

In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation). If one likes analogies, the size of a balloon is like the price level, while the inflation rate is how quickly it grows in size. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money.

If P₁ is the current average price level and P₀ is the price level a year ago, the rate of inflation during the year might be measured as follows:

inflation rate = (P₁ - P₀)/P₀, stated as a percentage.

There are other ways of calculating the inflation rate, such as the natural log of P₁ minus the natural log of P₀, again stated as a percentage.