The inflation rate is the percentage increase of prices for a set of goods and services over time. This measure is important for both consumers and businesses. Consumers want to purchase items at reasonable prices and businesses need to know how much costs are going up so they can plan accordingly.
Ultimately, the inflation rate is determined by supply and demand. People need a wide range of products and services to live, including commodities like food grains and metals, utilities like electricity and transportation, and service industries like healthcare, entertainment, and labor. The Bureau of Labor Statistics measures the average change over time in the price of a basket of items, known as the Consumer Price Index (CPI), to assess consumer inflation. A separate measure, the Core Consumer Price Index, excludes foods and energy to get a more accurate picture of underlying inflation trends.
Inflation can help boost economic growth, but it can also slow down or even reverse a country’s economy. High inflation often leads to household belt-tightening, which in turn reduces aggregate demand and can lead to layoffs and a faltering economy. Inflation can also make it harder to save and invest, which stifles growth in the economy.
Inflation can also lower the purchasing power of a nation’s currency, which makes it more expensive for citizens and companies to buy international products. However, a rising inflation rate may stimulate a country’s economy by encouraging investment in assets, such as stocks, real estate, or commodities, which can return better returns than cash.