Goods and services are produced (supply) and then purchased (demand), and money moves through the economy.
Naturally, supply and demand fluctuate over time; you don't need a new TV every month.
Inflation is caused by when imbalances between production and consumption are sustained for longer periods of time.
Let's start with the three types of inflation, and then dive into the causes of each one.
The most common terms for the types of inflation are:
In the end, inflation is caused by some combination of all three types.
Ever see an auction? People talk about bidding up the price (also called "demand-pull")...this is classic price inflation; people keep making higher and higher bids in an attempt to purchase something.
On a large scale, we see this happen when the economy is humming along; people get hired, make more money, buy more things. Companies try to capture this trend by increasing prices.
A common example of this type of inflation is the loss of an orange crop increasing the price of orange juice (also called a supply shock). The loss in supply means that orange juice producers must charge more to stay in business, because it costs them more to buy oranges. Therefore, the lack of oranges creates an increase in price.
Another good example is when you hear about airlines raising ticket prices because the price of jet fuel has increased (also called "cost push").
Employees expect their cost of living to increase each year, so they push for raises (hence the term cost of living raise). To offset the increased wages, companies pass along the increased "cost" of their labor by increasing the price of their products and services. So the price of stuff increases.
Some amount of inflation is good and means the economy is growing. However, too little or too much is bad for the economy, and controlling the amount is tricky.
If inflation is too low, then deflation can occur.
If inflation is too high, then prices also tend to be high and "hyperinflation" can occur.
So inflation that is too high is bad, and not enough is bad. This is why you hear politicians and federal reserve employees talk about a sweet spot for inflation. Usually, the Fed tries to take actions that balance growth and inflation at a "moderate" rate.