An inflation rate is a measure of the average change in prices for goods and services purchased by consumers. It is typically calculated monthly and reported by government agencies such as the Bureau of Labor Statistics (BLS). The Consumer Price Index (CPI) monitors the prices of a basket of economic goods and services including food, clothing, recreation, transportation, education, and housing. Changes in this basket of items equate to the change in overall consumer prices and are used to adjust for cost-of-living increases and to calculate benefit payments to Social Security recipients. More granular measures such as core consumer and gross domestic product (GDP) price indices are also available, which focus on the underlying trends in inflation.
Increasing consumer demand for products and services is often the driver of inflation. Inflation can also occur if a government injects money into the economy to stimulate demand and growth, or if there are supply chain disruptions that push up commodity prices. If the pace of inflation exceeds a country’s production capacity, this can lead to shortages and higher prices for certain products or categories of goods such as oil, wheat, or grain.
A high or unpredictable inflation rate can distort purchasing power, negatively affecting individuals and businesses alike. For example, an individual with a fixed-rate pension that is raised by 3 percent annually may lose purchasing power over time if inflation is higher than that amount. Investors who invest their money in a company or in physical assets like property or stocked commodities often see their investments grow at rates higher than inflation, which makes investing attractive for people trying to reach financial goals that require savings over an extended period of time.