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Inflation refers to a general increase in prices over time. This phenomenon occurs when the overall level of prices for goods and services rises, eroding purchasing power. In simple terms, as inflation rises, each unit of currency buys fewer goods and services, which can lead to a decline in the real value of money.

Understanding inflation is crucial, as it affects consumers, businesses, and the economy at large. For example, if the rate of inflation is high, people may find that their wages do not stretch as far as they used to, potentially altering spending habits. Central banks actively monitor inflation rates and may adjust monetary policy to manage economic stability.

Other options deal with different concepts. A decrease in average price levels describes deflation, which is the opposite of inflation. An increase in wages alone does not encapsulate the broader economic impact of inflation, as it does not necessarily reflect price increases across various markets. Lastly, while an increase in the quantity of money in circulation can contribute to inflation, it is not a definitive description of what inflation itself is.