The inflation rate measures how fast prices for a basket of economic goods and services are rising. It is a key metric used by economists and investors. It impacts everything from consumer spending and business investment to government programs, tax policies and interest rates. A low, stable rate of inflation is often considered positive for an economy.
But inflation can have many negative effects as well, especially for people on fixed incomes, such as Social Security recipients and retirees, who must spend more to maintain their purchasing power. It can also make it harder to save money, encouraging individuals to engage in riskier investment strategies in an attempt to increase their wealth. Inflation can also hurt businesses, which may not be able to pass on rising production costs to their customers or raise wages for workers.
Fortunately, inflation can be controlled and managed by governments and central banks. A temporary spike in demand or too much printing of money can trigger a bout of inflation, while economic growth or supply shortages can cause deflation.
The most popular metric used to measure inflation is the Consumer Price Index (CPI). It looks at price changes for a set of items that are considered essential to most consumers, such as food, gas and shelter. The CPI is weighted, so that even if the price of one item rises dramatically, the headline inflation rate will only reflect changes in the average cost of the items in the basket. Another way to track inflation is through the Personal Consumption Expenditures (PCE) price index, which takes into account more expenditures, including things like education and recreation.
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