Similar to economic inflation, GPA inflation is a drop in value of the "grade points" used in most schools today due to a dramatic increase in competition. In the past, a 4.0 used to be sufficient, but now it's hardly enough.
Strained by the sheer number of incoming applications, many colleges try to narrow down the applicants by accepting only those with the highest GPA. This, in turn, causes students to try to raise, or "inflate," their GPA by taking AP, IB, or Honors courses.
Unfortunately, this causes the colleges to raise their bars even further since so many students have 4.0's or above.
A: Hey, look at this, College X just rejected this guy who had a 4.1!
B: What?! It was accepting 3.8's last year! That's just ridiculous...
A: GPA inflation, man. That's what it is.