JPEG is a lossy compression method for images that works by converting images to YCbCr color space, applying discrete cosine transform (DCT) to separate frequencies, quantizing coefficients to reduce detail, ordering coefficients with zigzag scan, encoding runs of zeros and differences between values. It can operate in sequential, progressive, lossless or hierarchical modes depending on whether full quality is needed or partial images can be viewed. The encoding process involves color space transformation, DCT, quantization, zigzag scan, run length encoding, and Huffman entropy coding to compress images for storage and transmission with a high ratio while maintaining good quality.