A measure of how fast prices rise over time, which affects people’s purchasing power. The inflation rate is calculated by tracking price fluctuations of a “basket” of goods and services that are purchased by most consumers in the US, including everyday items like bread and bus tickets as well as larger purchases such as cars and vacations. This is a useful gauge of how quickly costs are increasing so that government policies can be adjusted accordingly.
Inflation reduces the buying power of money, and it can have negative effects on economic growth. It also can cause people to lose faith in the currency, and it may push investors to invest more in assets like real estate or commodities that typically rise with inflation. However, it is a problem for some groups, such as those on fixed incomes who have difficulty keeping up with the changes.
The most significant factor in inflation is supply and demand, which can be affected by a number of factors, including limited fuel supplies that raise gas prices or a relaxed monetary policy that circulates more currency than the economy can support (which causes ‘core’ inflation to rise). A recession or other events can lead to lower consumer demand, causing prices to fall and lowering the inflation rate.
The most common way that inflation is measured is by using the Consumer Price Index (CPI), which includes a large basket of goods and services to represent most spending habits. It can be broken down into headline and core inflation, with the former excluding energy and food prices since those are more volatile and not necessarily indicative of long-term price trends.
About the Author
