Which of the following best defines 'inflation' in economic terms?

The concept of inflation in economic terms is accurately defined by an overall increase in prices and a fall in the purchasing value of money. When inflation occurs, it signifies that the cost of goods and services is rising, which means consumers can buy less with the same amount of money than they could previously. This decline in purchasing power signifies that while nominal prices may rise, the actual economic value of those prices in terms of what people can afford diminishes.

Inflation is typically measured using a price index, such as the Consumer Price Index (CPI), which tracks the average change in prices over time for a basket of goods and services. A consistent rise in this index indicates inflation.

In contrast, options indicating a decrease in price levels, an increase in buying power, or a stable price level do not encapsulate the essence of inflation and instead refer to deflation or price stability, which are fundamentally different economic states.