It's sort of simple, inflation is when prices go up and deflation is when prices go down. The key is what price are we looking at and what time period are we measuring over?
For example, let's say we want to measure the inflation in the price of tricycles. The price history might look like this:
| Date | Amount | Date | Amount | Date | Amount |
| 1/1/2020 | $100 | 1/1/2021 | $111 | 1/1/2022 | $125 |
| 2/1/2020 | $105 | 2/1/2021 | $117 | 2/1/2022 | $131 |
| 3/1/2020 | $110 | 3/1/2021 | $123 | 3/1/2022 | $138 |
| 4/1/2020 | $121 | 4/1/2021 | $135 | 4/1/2022 | $152 |
| 5/1/2020 | $133 | 5/1/2021 | $149 | 5/1/2022 | $167 |
| 6/1/2020 | $120 | 6/1/2021 | $134 | 6/1/2022 | $150 |
| 7/1/2020 | $108 | 7/1/2021 | $121 | 7/1/2022 | $135 |
| 8/1/2020 | $97 | 8/1/2021 | $109 | 8/1/2022 | $122 |
| 9/1/2020 | $87 | 9/1/2021 | $98 | 9/1/2022 | $110 |
| 10/1/2020 | $91 | 10/1/2021 | $103 | 10/1/2022 | $116 |
| 11/1/2020 | $96 | 11/1/2021 | $108 | 11/1/2022 | $122 |
| 12/1/2020 | $106 | 12/1/2021 | $119 | 12/1/2022 | $134 |
So the price went up and down over time. If we look at the price in December of 2022 compared to the price the year before, it went up 12.6%. But if we look at the December 2022 price compared to the price in May of 2022 it went down 20%. Is that inflation or deflation? It's both.
The general standard for measuring inflation is to measure what has happened since one month ago and one year ago. The one month comparison tells you the most current trend, and the one year comparison tells you the longer term trend. But we can see from the example above that the direction and percent of change is heavily influenced by what happened in the comparison period. If prices one year ago where unusually high, it's likely that this year's comparison will seem low. If prices in the comparison period were unusually low, it's more likely that this year's comparison will seem high.
The comparison period isn't the only thing that can skew results. We don't usually look at a single price, we usually look at a basket of prices, and this introduces more confusion. Which items are we going to put in the basket? If the prices of things that happen to be in the basket are going up faster than other things, the basket might make inflation look higher than it is, and vice versa. The hope is that the basket is a good representation of the overall cost of living, but the specific things in that basket may or may not actually be a good measurement.
To make things even more confusing, the things that are in the basket, and the weighting of the things in the basket, are periodically changed. So the basket for this year's price measurement might contain different things, or different amounts of the same things, than the basket from a year ago that we are comparing to.
The point is that we need some kind of measurement, and this is as good as we can do, but we have to take it with a grain of salt.
What really matters? Two things. First, the publicly-accepted measurements matter because that's what everyone else is looking at and it can drive things like what happens to prices of stocks or houses. It's important to understand that because we might need to buy or sell things or take other action to account for where it looks like prices in general are going.
Second, what really matters to us individually is what is going on with the prices of things we actually need or want to buy. If we think the prices that especially matter to us are going down, we might hold off on a purchase to see if we can get a better deal. And if prices are going up, we might accelerate a purchase to buy it before it goes up more. The important thing to us personally is whether the things we can't live without are still affordable to us.