The inflation rate measures the increase in the price of goods and services over a specified period. It can be measured on a month-to-month or year-to-year basis, and is conveyed as a percentage. The inflation rate can affect the purchasing power of a country’s currency, so it’s important to understand how it’s calculated and how it impacts your budget.
To measure the inflation rate, economists look at a basket of goods and services that represents what consumers actually purchase. This includes things like food, housing, transportation and healthcare. Economists then watch how the prices of these items change from one month to the next and from year to year. A higher number means that prices are rising on average, which can reduce the value of currency over time.
While there are several different ways to calculate the inflation rate, the most common is the Consumer Price Index (CPI). To find the CPI, the Bureau of Labor Statistics collects prices on a broad range of goods and services that householders buy. This includes everything from TVs to prescription drugs to college tuition. The BLS then assigns weights to these goods and services based on their importance to household consumers. Finally, the BLS adds up all of these prices to create the CPI.
There are also other ways to measure inflation, such as the GDP deflator or the core consumer price index. These differ from the CPI because they exclude prices set by governments and more volatile prices, such as those for energy and food, that can be affected by seasonal factors and temporary supply conditions.