Inflation is a monetary phenomenon: it basically means that all prices go up, in a way that is not related to market scarcity.
So, if the foodstuff section in your supermarket becomes more expensive, and the hardware section becomes cheaper it is not inflation. But if when you get at the checkout your bill is steadily 3% more every month, for the same average set of purchsed goods, then it is inflation.
Inflation can be accompanied by a raise in salaries, so that the average citizen's buying power stays more or less the same (you are able to eat the same amount of Cool Whip per month).
Alternatively, producer margin can be reduced (the maker of Cool Whip gains less money), or citizens can be told that these are hard times, and will please everybody tighten their belts ?
Some economists believe that a moderate amount of inflation is actually good for an economy, though there is dissent about exactly how much. Notice that in some economies, the so called free market ones, the government cannot really lower or raise salaries - but it can usually work on taxes.
One major lever to act indirectly on inflation is the prime rate, which means basically the price of borrowing money from a bank.
Historically, and in different countries, inflation has been anywhere between zero and thousands per cent per year: notorious examples are Weimar Germany and Argentina.
Very high inflation rates weaken a currency, because people tend to get rid of it and buy either gold or more solid currencies (like Swiss francs).
Now what I would really love is for an economist to come out of the woodwork, tell me that all this is crap and write a good writeup on the subject.