The inflation rate measures how quickly prices increase in a given country. It’s calculated by comparing the current price level of a basket of goods and services with the previous one, adjusting for time. Statistical agencies track prices of about 700 items in the “basket” to ensure that it represents the real spending habits of consumers. The most popular measure of inflation in the US is the Consumer Price Index (CPI), which is published by the Bureau of Labor Statistics and updated each month. The CPI tracks two types of inflation: headline and core. The core inflation rate excludes food and energy, which are more volatile due to weather or supply chain issues. It’s the type of inflation that policymakers watch most closely.
High levels of inflation are bad for everyone. It erodes the purchasing power of savings and reduces the amount of interest that can be earned on investments. It can also make a nation’s currency less competitive with international currencies, which hurts exporters and importers alike.
Inflation can be caused by a variety of factors, including government policies that increase the money supply. It can also be triggered by demand shocks, such as COVID-19 relief packages or slowing economic growth. It can also be caused by a supply-chain issue, such as housing shortages or labor strikes. It’s important for investors and individuals to understand how inflation affects them so they can plan accordingly. For example, when saving for a down payment or retirement, it’s smart to include the expected inflation rate in your planning to determine how much you need to save.
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