The inflation rate measures how fast prices are rising in a basket of economic goods and services. This is because individuals need a big diversified set of products and services to live well, such as commodities like food grains, metal and fuel, utilities like electricity and transportation, and services like healthcare, entertainment and labor. Trying to track the impact of price changes on a single product would be an impossible task, so measuring price changes across a whole economy is a more practical solution.
The most widely watched measure of inflation is the Consumer Price Index (CPI) from the Bureau of Labor Statistics, published monthly. There are other measures of inflation, such as the Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis, that take into account more spending and other information to offer a broader picture of how consumers are experiencing price increases. These other measures, including core consumer inflation which excludes food and energy, are also watched closely by policymakers.
A low, steady or predictable level of inflation is usually considered good for a country’s economy. It can increase people’s purchasing power and help drive economic growth. Businesses often raise prices when demand exceeds their supply. This is known as demand-pull inflation. However, if they raise prices too much, they may discourage consumption.
Inflation affects many aspects of the economy, from how people spend money to interest rates on government bonds. Understanding how inflation works is a key element to promoting a healthy, sustainable economy.
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