Inflation rates affect people’s purchasing power, economic growth and interest costs on the national debt. Understanding and properly managing inflation is a key component to promoting a healthy economy.
Statistical agencies survey prices at a wide range of locations to determine the current value of a basket of consumer goods and services, referred to as a price index. Then they compare the index to its previous value over a period of time to measure monthly or annual rates of inflation.
For example, the US Bureau of Labor Statistics (BLS) tracks the Consumer Price Index (CPI), which is used to adjust Social Security benefits and other government compensation, provide cost-of-living adjustments for workers and monitor overall consumer price trends. This basket of goods is regularly updated to reflect new products and services, changing consumer preferences and the disappearance of old ones.
A high rate of inflation is often considered bad for an economy because it decreases the purchasing power of a currency. It can also make saving and investing less attractive because money saved in the future will not buy as much as it would if saved today.
High or unpredictable inflation can also erode business profits because the higher production costs of raw materials and wages must be passed on to consumers. This can lead to stagflation, where high prices are combined with slow or no economic growth.
Some people may even hoard goods to protect against high prices, creating shortages and increasing consumer prices. This is known as cost-push inflation.