What is inflation?

Inflation is defined as a decrease in the purchasing power of money, which means that as inflation rises, each unit of currency buys fewer goods and services than it did before. This phenomenon typically results from an overall increase in the prices of goods and services within an economy over a certain period. When inflation occurs, consumers find that their money doesn't stretch as far, leading to a reduced ability to purchase the same quantity of products and services as they could previously.

The other choices do not accurately represent inflation. The increase in wages across an economy might occur due to various factors including inflation, but it does not define inflation itself. The increase in production capacity refers to the ability of an economy to produce more goods and services, which could be a result of economic growth rather than inflation. Lastly, the rate at which the value of currency rises describes deflation or could relate to currency appreciation but does not align with the definition of inflation as an increase in price levels.