The inflation rate describes how fast prices are rising and reduces the purchasing power of a currency. It is different from deflation, which is when prices fall. There are many ways to measure inflation but one of the most popular is the Consumer Price Index (CPI) from the Bureau of Labor Statistics.
CPI is an average of the prices of a basket of consumer goods and services from urban areas across the country. It includes food, clothing, utilities like electricity and gas, as well as housing costs. CPI is an important indicator for policymakers and investors as it tracks the cost of living for most of the population.
During periods of high inflation, consumers can feel it most acutely as their money won’t go as far. This may cause belt tightening and discourage savings. Inflation also affects businesses because higher input prices (like food or oil) will drive up production and transportation costs for all goods and services. However, if inflation is moderate or mild, it can actually be beneficial for both businesses and consumers by motivating them to spend.
Inflation is a global phenomenon that impacts all economies, but it can vary by region and time. It is influenced by a wide range of factors including economic growth, government policy, supply chain disruptions and geopolitics. It is important to bake in a realistic inflation rate when planning financial goals so that you can save enough to achieve them.