Inflation is when prices rise, so that the value of an individual unit of money is worth less. When you see an old comic book has a price of 10 cents on the cover, and today a comic book costs $4.99, the difference in price is in part due to inflation.

Deflation is when prices fall, so that the value of an individual unit of money is worth more. This happens less frequently, but you can compare it to the cost to buy a book that was hand-copied by a scribe to the cost to buy a book that was mass produced by printing technology - the industrialization of the process saves on labor, so the overall cost per unit goes down.

The causes of inflation and deflation are many and varied. In part, it has to do with the fluctuation in the supply and demand for each good in the economy, and in part it has to do with the availability of the money supply. All of these can change over time, and affect the value of money.

The supply of goods change over time as production changes and the goods are consumed - take farming as an example. A plot of land might produce 10 bushels of wheat one year and 11 bushels of wheat the next year; so the land has produced more wheat, and their is more supply - if the demand is constant, that means that their is more wheat and the relative price per bushel should fall. In practice prices tend to be sticky (and historically, were sometimes fixed by decree or statute), but in an open market the more wheat you have, the less each individual unit of wheat is worth - so the price falls and you can buy more wheat for the same amount of money. In a town under siege, where no new wheat can be grown or imported, the supply declines over time and the price rises - so you can buy less wheat for the same amount of money.

Historically, the supply and demand for all goods had fluctuated widely - leading to a great deal of change in prices; in general the improvement of technology and infrastructure has led to large increases in supply (and quality) of basic goods like foodstuffs - the average farm today produces more wheat than it did a generation ago.

So why is bread more expensive, if there's more wheat being produced? Because the other thing that affects prices is the money supply.

Money is not usually thought of in terms of a commodity, but it follows the same basic supply-demand principles as any other good. Normally, this is thought of as "the more money there is, the less each individual unit of money is worth" - and money is generally created constantly. In previous historical periods, money was usually synonymous with specie, physical precious metals (gold, silver, copper, etc.), and the value of any coined money was based on the amount of such metal in the coin. Mining more metal and coining new coins caused more money to enter into the local economy; making golden candelabra for the local monastery took metal out of the economy; debasing the coinage (re-coining it with less precious metal per coin) caused more money to enter the local economy, but each piece was worth less; foreign trade could cause more foreign money to enter the local economy, increasing the money supply; a merchant fearing a war might bury a hoard of coins, decreasing the money supply; etc.

All of these various actions can affect the amount of money in circulation and, ultimately, affect prices. It's usually easiest to see this in terms of debased coinage, since there's physically less precious metal in the "new" coins (higher supply), making the "old" coins more desirable (higher demand); even if the coins nominally have the same face value, the new coins are worth less (and so more of them might be needed to buy the same goods as the old coins), while the old coins are worth more.

Less tangibly, there's the issue of credit. This is when goods are exchanged for the promise of money, or money is lent with the promise of repayment in the form of a loan; in both cases, you can have more "money" in circulation than actual amount of coins in circulation - the money exists in a merchant's ledger, in goldsmith's notes, or today in electronic accounts. Pretty much all of our modern banking system works on fractional reserve banking, where banks keep only a certain amount of physical currency on hand, and lend out the rest. So, for example, during the 1920s a local bank might have deposits equal to $10,000 in its accounts, but only keeps $1,000 cash on-hand for daily business; the other $9,000 has been lent out (to be repaid with interest). So long as physical demands for cash are less than what they have on hand, this works out fine; when it doesn't - as during a bank run during the Great Depression - you can get a bankruptcy. But think about that for a moment: despite only having $10,000 in its accounts, the bank also has $9,000 in loans - so the bank has essentially created money by loaning it out, creating a virtual expansion of the money supply, even as the amount of physical currency stays the same.

Currencies based on precious metals have the overall downside that gold, silver, etc. are very specifically commodities, and can be mined or speculated on like any other - so the value of money was tied directly to the value of the commodity; this was called the gold standard when currency was based on gold, silver standard where it was based on silver, bimetallic standard when based on gold and silver, etc. Eventually, the physical movement of gold and silver became less useful as the economy expanded, and paper notes began to circulate - these were still backed by gold or silver, and could be redeemed for a certain quantity of gold or silver at the issuing institution, and because of their convenience really took off as a concept.

However, they had their drawbacks: paper was easily printed (and counterfeited), and banking was often poorly regulated (especially in the 19th century), so it was easy for a bank (or government) to print and issue more paper notes than it had actual gold and silver to cover it. This led to, again, more expansion in the money supply - and when the banks went bust or people stopped accepting the paper notes, could lead to restriction of the money supply.

Still, this showed a couple of very important things: one is that you didn't need physical gold or silver to act as money. As long as people accepted and used the paper notes, they worked the same as money; and if the notes were not tied to a commodity like gold, then their value was independent of the shifts in the price of gold. That meant that if a centralized agency - like the Federal government in the United States - could monopolize the production of currency, they could have much better control of the supply of this fiat currency than they could currency backed by precious metals.

On the other hand, it also meant that a government which overprinted currency could lead to rapid destabilization of prices - like the hyperinflation which hit Weimar Germany in the 1920s, for example. In this case, production of currency hits a feedback cycle with prices - too much money is printed and the value falls, so prices rise, so more money is printed to cover the inflated prices, which causes the value of the money to fall further so prices rise... it's a vicious and unsustainable cycle.

Generally speaking in our contemporary era (20th and 21st century), most money is fiat currency issued by government banks, and subject to various controls to ensure a low rate of inflation - deflation is harder to deal with, since economists are justly worried about hyperinflation and don't like to use "let's just print more money" as a cure-all for all economic ills.

Our current experience with the changing value of money has to deal with both inflation from the increase of the money supply, and the general deflation caused by the lower cost of goods - personal computers, for example, have fallen substantially in price since they first hit the market, while continuing to improve in quality...which makes it more difficult to assess historically. A hundred years ago, there were no personal computers; a computer was a person that computed, not a machine.