The inflation rate is the percentage that describes how quickly prices are rising. The inflation rate is an important number to know because it affects the purchasing power of money over time.
Several government datasets track price changes, but the most comprehensive data set that covers a wide variety of consumer products is the Consumer Price Index (CPI). CPI monitors the prices of a basket of goods and services used by 90% of the U.S. population, such as food, clothing, shelter, medical care, recreation, transportation and education. The CPI is a key indicator of what people are paying for things and is used to calculate inflation, wages and other economic metrics.
Some prices change every day, while others take longer to adjust (such as wages established by contracts). Unevenly rising prices reduce the purchasing power of consumers, which leads to inflation.
A variety of factors can cause inflation, including supply chain disruptions, high demand and government spending. Over the past couple of years, the Federal Reserve has been working hard to tame the inflation genie that was unleashed by the COVID-19 pandemic, the Russia invasion of Ukraine and the resultant price shocks in energy and food.
Inflation can be either a good or a bad thing, depending on how much it distorts relative-price signals that help guide consumption, production and labor choices throughout the economy. For example, higher inflation can make it less worthwhile to save for the future because the interest earned on savings will not keep pace with rising costs. On the other hand, individuals with tangible assets that are priced in their home currency may actually benefit from inflation because it makes those assets more valuable over time.
About the Author
