One big idea in economics and a key to understanding a countries economic health is inflation. First what is inflation? and Why does it happen?

Inflation simply put is when there is "a sustained increase in the supply of money" which leads to the increase in the prices of goods and services. For the longest time I thought there was a little magic involved or someone at the capital must sit at a desk and guess at the worth of the dollar that is currently circulating. Now that I understand the concepts of supply and demand it would be logical that currency should follow the same rules.

The Federal Reserve, through the request of banks, is in charge of meeting the demand for money. Banks request the money they need to meet their customers demand and the Federal Reserve issues the currency while backing the notes with collateral in the form of Government Securities or Gold Certificates. Banks also return money in the form of a cash deposits with the Federal Reserve. The Fed in turn removes the bills that are unfit for circulation and destroys them. Then a request is put in to the Bureau of Engraving and Printing to replace the old money with new. The Fed When the Federal Reserve is seeking to meet the demand for currency they do not simply "print more money". "The important concept here is that every time the Fed creates money, that money does not increase the total money supply in the economy, it increases the size of the Fed's balance sheet." Inflation The more appropriate name might be an "asset swap" on the Feds balance sheet. 

So how does inflation happen. What I didn't understand before was that inflation is a process. If the supply of currency increases that increases the demand for all goods and services because the average person has more money to buy them. Before production can match demand stores would have to set prices higher to avoid shortages. Even if this didn't occur producers respond to the spike in demand by increasing production. But increasing production happens at a price causing an increase in consumer prices. Each time prices across the board rise that means the dollar can buy less. Now you need more of them to buy what you did before with less. 

On the flip moderate inflation can be a good sign. A rise in prices signals healthy demand. Money in circulation makes for a moving economy. Inflation can be good?