A rising rate of inflation means that a given amount of money will buy fewer goods and services over time. This erosion of purchasing power reduces the standard of living of consumers, and can slow economic growth. To combat it, governments often use a variety of policies to control inflation.
The rate of inflation is typically measured by tracking price changes in a basket of consumer goods and services that represent the spending habits of most people. Governments like the Bureau of Labor Statistics produce a variety of price indices to help policymakers, business leaders and consumers track inflation trends. One of the most widely used indices is the Consumer Price Index (CPI), which tracks prices paid by urban consumers on a variety of products and services. Other measures include the Producer Price Index (PPI), which is more volatile but includes the prices of commodities and inputs such as energy and food that are heavily affected by temporary supply conditions.
There isn’t a single cause of inflation; it depends on the ratio of aggregate demand to aggregate supply at any given moment. But sustained periods of high inflation can result from excessive printing of money, a runaway economy or other factors.
Most people don’t think about inflation as it impacts their everyday lives, but the effect of rising prices is felt by everyone from workers to executives and consumers alike. Even savings in a bank account can lose value to rising inflation over time, so it’s important to bake in an appropriate rate of inflation when planning for future expenses.