How is inflation defined?

Inflation is defined as the rate at which the general level of prices for goods and services rises, which subsequently leads to a decrease in the purchasing power of money. When inflation occurs, each unit of currency buys fewer goods and services than it did previously, reflecting a decline in the value of money. Understanding this concept is crucial for individuals and businesses as it impacts budgeting, investment decisions, and economic strategies.

The other options involve related economic concepts but do not accurately define inflation. For example, the notion of the rise in the value of money is essentially the opposite of inflation, which focuses on decreasing value due to rising prices. The decrease in the supply of goods could lead to inflation under certain conditions, but it does not define it. Similarly, while increased government spending can influence inflation rates, it is not a definition of the phenomenon itself. Thus, defining inflation through the lens of rising prices provides a clear understanding of its impact on the economy and personal finance.