How is inflation commonly defined?

Inflation is commonly defined as the rate at which prices for goods and services rise. This definition captures the essence of inflation as a measure of the overall increase in price levels within an economy over a specific period of time. As prices rise, the purchasing power of money decreases, meaning that consumers will need to spend more to acquire the same goods and services they could previously purchase for less.

Understanding this definition is important as it allows individuals and policymakers to gauge the health of the economy. Moderate inflation is often viewed as a sign of a growing economy, but high or unpredictable inflation can lead to economic uncertainty and erode savings.

The other options present related concepts but do not accurately define inflation. A reduction of the money supply can be associated with deflation, or the opposite of inflation, leading to a decrease in overall prices. The increase in consumer demand can contribute to inflation, but demand alone does not define it. Lastly, measuring national economic growth typically involves assessing GDP or other growth indicators instead of directly measuring price levels.