Inflation is a gradual increase in prices of goods and services. This reduces the purchasing power of money, and can make it more difficult to achieve financial goals. Inflation also can cause higher interest rates, which increases the cost of borrowing for consumers and businesses. While many people view inflation negatively, it can have some benefits for both consumers and companies.
Several data sources track price fluctuations, but the most widely used is the Consumer Price Index (CPI) published by the Bureau of Labor Statistics. The CPI tracks the price changes for a specific basket of goods and services purchased by urban consumers. It also includes a number of additional categories to help policymakers and business leaders track overall economic trends.
A metric called core consumer inflation is used to gauge more long-term price trends. It excludes volatile food and energy prices, which can fluctuate due to supply chain issues, weather, and seasonality. This gives a more accurate picture of actual consumer spending habits, and is the metric the Federal Reserve watches closely.
There are a few different kinds of inflation, and the drivers can impact how long it lasts. A temporary spike in oil prices or a burst of government spending can create short bouts of high inflation. But sustained periods of overprinting money or excessive deficit spending can lead to more lasting inflation, and even hard-to-control “inflation spirals.” High inflation makes a currency less competitive in global markets, which leads to lower exports, a current account imbalance, and slower GDP growth. It can also reduce the value of savings, because the real-world returns on investments don’t keep pace with inflation.