The inflation rate is a measure of how quickly prices are rising for a basket of economic goods and services, such as food, housing and utilities. It’s an indicator of the purchasing power of a country’s currency and can have serious implications for its citizens, businesses and financial system. While a certain amount of inflation can be seen as an indication of growth, too much inflation causes problems including eroded purchasing power and increased instability in the economy and financial markets.
The most popular metric for measuring inflation is the Consumer Price Index (CPI), which measures the prices of a wide variety of consumer goods and services that people use on a regular basis, from food to cars. The CPI is weighted so that changes in the prices of one item don’t drive the whole index up or down. This gives a more accurate picture of the overall effects of inflation. Another common measure of inflation is the Producer Price Index (PPI), which tracks and compares prices at the wholesale or factory level, before they are sold to consumers.
Inflation occurs when aggregate demand increases, driving up the cost of producing and delivering those goods and services. This can happen for a number of reasons, including when the central bank prints too much money or when market-disrupting events, such as natural disasters, raise production costs.
High rates of inflation can be a big burden for many people, especially those on fixed incomes who don’t see their paychecks grow at the same pace as the rising cost of living. This can lead to a lack of spending, a shift toward cheaper products or shopping around for better deals and can result in higher unemployment.