The inflation rate measures the increase in prices of a basket of goods and services over time. It is a key component of an economy and is often used to adjust government benefits, provide cost-of-living adjustments for employees and to measure the economic growth of a country. It is most closely associated with rising consumer spending but can also affect supply chain costs and the pricing of raw materials. The overall impact of inflation is a reduction in the purchasing power of money.
Inflation is measured by comparing the current price level of a set of goods and services to the price level of the same items at a certain point in the past, called the base year. Various price indexes exist, but the most commonly referenced is the Consumer Price Index (CPI), which is published by the Bureau of Labor Statistics in the United States. The CPI includes a large number of different categories that represent the average consumer’s basket of goods and services. There is also a core version of the index that removes the more volatile prices of food and energy to get a better picture of the underlying price trends.
Inflation can have both negative and positive effects on people, businesses and the economy as a whole. For consumers, it is a constant reminder of the rising prices of everyday goods and services. High rates of inflation can make it hard to keep up with expenses and can even erode savings. The most common concern of policy makers and business leaders is that inflation is out of control, which can lead to higher interest rates on debt, stifled economic growth and ultimately higher unemployment and slower economic recovery.