Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of money buys fewer goods and services. Inflation reflects a reduction in the purchasing power per unit of money.
Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services.
It has its worst impact on consumers. High prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep inflation under control. Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a limited level of inflation.
Many developing countries use changes in the Consumer Price Index (CPI) as their central measure of inflation. India used WPI as the measure for inflation but now on basis of Urjit Patel recommendations, new CPI (combined) is declared as the new standard for measuring inflation ( April 2014).