The inflation rate is one of the most important economic indicators to track as a consumer and investor. Inflation is an increase in the general price level of goods and services, and it’s the reason why money in your savings account doesn’t earn much in interest over time. Understanding the inflation rate can help you plan for future expenses and set realistic savings goals.
To measure inflation, statistics authorities around the world look at what’s known as a “basket” of everyday products and services like auto fuel, food, streaming fees and visits to the doctor or dentist to see how they’re changing month to month and year to year. These prices are combined into a single number that’s weighted to reflect the relative importance of these items to the average household.
This number is then compared to the same basket of products and services at a different point in time, often a previous month or year. The inflation rate is the difference between these two numbers and is represented as a percentage. The CPI, or Consumer Price Index, is the most well-known measure of inflation and is reported monthly by the Bureau of Labor Statistics in the U.S. Other measures of inflation include the Producer Price Index, or PPI, and the Core Personal Consumption Expenditures, or PCEPI.
A number of factors can affect the inflation rate, including the availability and supply of raw materials, labor mismatches and geopolitical conflict. Companies can respond to high inflation by increasing prices on their products and services, which consumers absorb, or they can cut costs by reducing the amount of goods and services they produce. A depreciation of the currency can also boost inflation because it makes imports cheaper and increases the price of imported inputs used by domestic firms.
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