Economic essays on inflation 28 November 2016 by Tejvan Pettinger UK inflation since 1989. Definition – Inflation – Inflation is a sustained rise in the cost of living and average price level. Causes Inflation – Inflation is caused by excess demand in the economy, a rise in costs of production, rapid growth in the money supply. Costs of Inflation – Inflation causes decline in value of savings, uncertainty, confusion and can lead to lower investment. Measuring Inflation – Inflation is measured by CPI and RPI. It is calculated by finding a typical basket of goods. Giving a weighting to goods and measuring price changes every year.