What drives inflation and why is it essential to modern economies?

Inflation is the increase in general price levels in an economy. It is measured by two indices; retail price inflation (RPI) and consumer price inflation (CPI). CPI is the more common measure and measures the year on year percentage price change for a weighted basket of goods that is chosen to represent the the average consumer's spending habits.
Inflation is driven by two elements. Firstly, there is cost-push inflation. This is when the prices of imports for business rises due to a number of factors (including currency depreciation, decreasing subsidisation, regulation, higher taxation etc). The business pass on the rise in costs to the consumer in the form of higher prices, protecting the margin on their product (price - marginal cost). The second element is demand-pull inflation where increased and consumer spending drives up prices as firms realise they can charge more for goods.
It is essential to modern economies because otherwise consumers anticipate falls in prices, and delay spending, reducing GDP and economic growth; causing a deflationary spiral as the process is self-fulfilling.