Inflation is characterized by rising prices and rising wages. The money in circulation in any economy is fed by the money supply and controlled by centrally set base interest rates. In the US economy the Federal Reserve sets the base interest rates. Through all the economic activity in an economy transactions are conducted and wealth is created by people adding value into the economy. The supply of money seeks to track the changing overall value or Gross Domestic Product in an economy. In practice most countries operate with a supply of money that outpaces the increase in overall value. This means that overall there is slightly more money chasing goods and services. There isn’t a direct causal relationship here by inflation is the extent to which the increase in money supply outstrips a growing economy.
