The inflation rate measures how fast prices for a predetermined set of goods and services are rising over time. The Federal Reserve strives to keep inflation at around 2 percent in order to support the economy. Inflation is a key factor in consumer spending and also has an impact on the value of currency.
A key driver of inflation is the increase in the price of intermediate goods, such as raw materials and fuels. This is known as cost-push inflation. Inflation can also be a result of global events such as supply chain disruptions from COVID-19 and geopolitics. Inflation also tends to affect the prices of finished products and services, which is called consumer price inflation or CPI.
High inflation can cause consumers to lose purchasing power over time, as the money in their wallet or bank account can buy less and less each year. This can lead to belt-tightening among households, as well as pessimism about the economy. Inflation can also encourage consumers to spend instead of saving, as they will want to purchase goods before their prices rise even more. This can boost sales for businesses.
Investors can benefit from inflation, as the value of their money decreases over time, making it easier for them to repay loans. Investors can also purchase assets like real estate or commodities that are likely to increase in value over time. The government offers Treasury Inflation-Protected Securities to protect investors from depreciation in the value of their investments.