What does inflation measure?

Inflation measures the rate at which the average price level of goods and services rises over a specific period. This is a critical economic indicator that reflects changes in the overall level of prices and can influence various aspects of the economy, including consumer spending, business investments, and monetary policy. When inflation occurs, the same amount of money will buy fewer goods and services, indicating a decrease in the purchasing power of money. This relationship highlights why inflation is a key focus for economists and policymakers; it impacts cost of living adjustments and wage negotiations, but fundamentally captures the essence of how prices change in the economy over time.

The other options, while related to inflation, do not capture the primary definition. Average wage levels pertain more to income and employment trends, while the cost of living adjustments relate specifically to wage changes in response to inflation. The fall in purchasing power is a consequence of inflation but does not directly define what inflation measures itself.