Inflation generally refers to the increase in prices of goods and services, or in other terms it refers to the decline in real value of money. That is, every dollar you hold buys less since prices are higher.
Monetary policy can directly result in an increase or decrease in inflation because the Federal Reserve is the lender of last resort, and controls the interest rate at which it lends money. The higher the rate, the less likely that borrowing will occur, and as a result less money is circulating. So generally, the Fed tries to combat inflation by raising interest rates.
But given a choice, the Fed seems worried less about inflation than it is about a general slowdown in the economy. Hence, interest rates are historically low, and as one observer put it, "the Fed has announced its intention to paper the face of the earth" -- that is to print and lend money to such an extent that the yield on Treasury Bills is approaching zero. What this means is that the big holders of government securities, such as China, which holds hundreds of billions in treasury bonds, will see little return on their investment.
In short, the Federal Reserve seems to be following a policy of "inflate or die": It appears ready to go to any length to spur economic activity, regardless of the amount of money it needs to print and lend.