Understanding Inflation in a video game
You seem to think of a game where objects are obtained at a fixed rate by farming. Fix supply of work for a certain object (bc. Only a few people know where to find things to farm or are high enough level or have the right profession) and increase demand (new players coming in or more players buying in game currency for real money) then prices for the object will soar over time, people producing the object will find it easier to sell it, so much so that they will increase the price until people stop buying it. This will inflate the price of the object. Whether this will last over longer period of time then depends on many factors : ability of supply to adjust (e.g. How much are player willing to switch to farming that object?), rate of new player characters coming in, their propensity to buy the object etc. 

There are  many other ways. One example I could think of: as a player on a WoW private server with moderate population I would routinely buy all objects from the auction house that I thought of as undervalued and put them back in auction at higher prices. This allowed me to gain arbitrage profit from less careful players and also to craft and sell the same object at higher prices.