The inflation rate is the percentage increase in prices for a basket of goods and services used by households over a specified period. It is a key economic indicator that can help investors identify when the economy may be in danger of deflation, a decrease in the overall price level.
A low or moderate inflation rate is generally considered a good thing. It helps businesses keep their prices stable, and it gives consumers a chance to make purchases with money that has gained in value over time. People who own tangible assets that are priced in the country’s currency (like real estate or stocked commodities) also prefer to see some inflation. Individuals can protect themselves against inflation by investing in Treasury Inflation-Protected Securities, or TIPS.
However, high inflation can cause problems, and it often leads to a loss of confidence in the currency. A persistently high rate can slow down long-term growth, and it usually requires decisive action by the central bank to bring it under control.
The specific causes of inflation vary, but they are typically linked to either demand or supply-side shocks. In some cases, a rise in demand outpaces the economy’s capacity to produce certain products or services. This is called demand-pull inflation. In other cases, supply-side shocks like natural disasters or wars limit production capacities, leading to bottlenecks and price increases. This is known as cost-push inflation. Ultimately, all of these factors affect how much consumers pay for their daily necessities.