The inflation rate measures the change in price of consumer goods and services. It is one of the main indicators used by central banks to adjust monetary policy and to gauge overall economic health. High inflation rates can lead to higher interest rates which make borrowing money more expensive. The inflation rate can also affect the buying power of consumers, who may spend less or even save.
While a rise in the inflation rate is not a good thing, there are some circumstances under which it may be beneficial. For example, if you are saving to buy a home, it is helpful to bake in an inflation rate when creating your budget so that you will be able to afford the costs of homeownership over time.
Inflation occurs when the demand for a product outpaces the economy’s ability to produce it. This is called “demand-pull” inflation and it can be caused by increased money supply, higher raw materials costs, labor mismatches and supply disruptions exacerbated by geopolitical conflict. The recent increase in inflation can be attributed to the above factors as well as the volatility of energy prices and backlogs of work orders from the COVID-19 pandemic.
The most popular measure of inflation in the United States is the Consumer Price Index (CPI) which includes items that consumers purchase directly, such as food, utilities and gasoline. However, the Bureau of Labor Statistics publishes a core consumer inflation measure, which excludes the most volatile food and energy prices and takes into account a broader range of items purchased by consumers. The producer or wholesale price index is another measure of inflation that can be found in some countries.
