The rate of inflation is one of the most important economic factors that governments, businesses, and individuals watch closely. The reason is that inflation affects many facets of the economy, including influencing people’s purchasing power, increasing or decreasing economic growth, and raising or lowering interest rates on debt.
Inflation is a measure of how much prices rise over time, and it’s calculated by looking at what economists call a “basket” of goods and services. The most well-known metric is the Consumer Price Index (CPI), which looks at a wide range of products and services, including food, gas, clothes, and electronics. It also takes into account rent and utilities.
A basket of goods can be volatile, though, as the prices of some items like food and oil may change rapidly due to short-term supply or demand conditions. For this reason, most statistic agencies also report a measure of core consumer inflation, which excludes these volatile components to better detect long run trends in the overall inflation rate.
While a little bit of inflation can be beneficial, high levels of inflation are bad for the economy. This is because higher prices can encourage consumption, as consumers may aim to buy things sooner than later, and because it reduces the value of savings. This can harm importers as foreign-made goods become more expensive, and it can hurt those whose wages or pensions are fixed in nominal terms, as rising prices erode the real purchasing power of these incomes.
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