The inflation rate measures how much prices are rising for a basket of goods and services. It’s often calculated on a country-wide basis but can also be narrowly focused on certain sectors of the economy. Inflation is a key driver of the cost of living and can have a significant impact on people’s purchasing power, economic growth and interest rates for the national debt.
The rate of inflation can be impacted by the speed at which new money enters the economy and the amount of goods and services available for purchase with that money. Inflation can also be distorted by price spikes for specific goods that are driven by a variety of factors including high raw materials costs, labor mismatches and supply disruptions. This type of inflation is called demand-pull and tends to be more damaging to the economy than supply-side inflation.
The most commonly used measure of inflation is the Consumer Price Index (CPI), which is a weighted index that includes the price changes for a broad basket of consumer goods and services. A narrower version of the CPI is the core consumer inflation rate which excludes the prices of food and energy that are more volatile and can be influenced by seasonal or temporary supply conditions. This version of the index is closely watched by policymakers and financial market participants. Inflation is typically good for the economy when it’s a modest 2-4% per year, but at recent very high levels it can make things more expensive for consumers and erode their purchasing power making it harder to afford essential goods or big-ticket items like homes.