What is inflation?

Inflation is defined as the rate at which prices for goods and services rise, leading to a reduction in the purchasing power of money. When inflation occurs, it means that consumers have to spend more money to buy the same goods and services compared to a previous period. This decrease in purchasing power can affect savings, investments, and overall economic stability. For instance, if a loaf of bread cost $2 last year and costs $2.20 this year, there has been a 10% inflation rate regarding that good.

While the other options touch on aspects related to economic behavior, they do not accurately capture the essence of inflation itself. The increase in money supply without corresponding demand may contribute to inflation but does not define it. A decline in consumer purchasing power describes a consequence of inflation but does not encapsulate the concept. Similarly, an increase in consumer savings rates, although relevant to economic discussions, does not correlate with the definition of inflation. Thus, the correct answer accurately portrays what inflation means in economic terms, specifically focusing on the relationship between price increases and purchasing power.