The rate at which prices change can affect a range of things, from a person’s purchasing power to interest rates on the national debt. Understanding and managing inflation is critical to fostering a healthy economy.
The underlying causes of inflation can vary greatly. Pent-up demand, a surge in government spending, high raw materials costs, labor mismatches and supply disruptions caused by events like war or natural disaster can all drive inflation. Alternatively, a rise in inflation could be due to an increase in the money supply or the issuance of new debt by central banks. This is known as demand-pull inflation.
People need a wide variety of products and services to live, from food and fuel to utilities such as electricity and transportation, and to health care and entertainment. To track prices, government agencies produce price indices. The most widely cited inflation indicator is the Consumer Price Index (CPI) published by the Bureau of Labor Statistics, and the Federal Reserve focuses on core CPI when assessing the economy.
A higher or unpredictable rate of inflation can reduce a person’s purchasing power and lead to household belt-tightening. It can also make it hard for companies to budget and plan long-term, as they must adjust their prices regularly to compensate for the loss in purchasing power.
A low, steady or predictable rate of inflation is considered positive for an economy because it signals growth and healthy demand for goods and services. A low and stable rate can even help people save by ensuring the value of their money is rising over time, rather than falling.