Inflation is a gradual rise in prices within an economy over a sustained period.  It refers to the rate at which prices for goods or services is rising within that economy and therefore to the falling value of its currency. If inflation is running at 5%, an item that costs £1 today will cost £1.05 in a year, for example. To keep the economy running smoothly, central banks try to limit inflation and avoid deflation. 

Many investors hedge against rapid spikes in inflation with derivatives like call options or futures contracts that are designed to reduce risk and protect the value of underlying assets.