Inflation occurs when prices rise faster than people’s incomes. Over time, that can diminish the purchasing power of money and make it harder to balance everyday expenses against a paycheck or bank account. Inflation can hurt everyone, including workers who lose their spending power and businesses that need to increase prices in order to cover higher input costs. It can also affect the savings of people who want to save for something in the future, making it hard to reach those goals.
The way most economies measure inflation is to look at the price level of a basket of goods and services used by households. This is called a consumer price index (CPI). To calculate the inflation rate, statisticians compare the value of that CPI on a particular date with the same basket on an earlier date. That’s it! You can find CPI data from a number of sources, including the Bureau of Labor Statistics. The two most popular measures of inflation are the overall CPI and a core measure that excludes food and energy.
When it comes to predicting inflation, many factors can influence the rate, including expectations of future prices, supply and demand, and how much people are saving or borrowing. Governments and central banks also play a role in managing inflation with monetary policy. For example, the Federal Reserve can increase or decrease the money supply in an effort to keep prices stable. The Fed is tasked with a dual mandate to maximize employment and keep inflation low.