The rate at which prices rise is an important economic indicator and can affect many facets of the economy. It can impact people’s purchasing power, slow or accelerate economic growth and even raise or lower interest costs on the national debt. Understanding and properly managing inflation is key to promoting a healthy, sustainable economy.
Consumers typically experience inflation when the demand for a product exceeds the economy’s ability to produce it. This is known as demand-pull inflation. Companies also play a role in inflation. When a company manufactures a popular product, consumers are willing to pay more for it than they would otherwise be, giving corporations leverage to raise prices as necessary. This is known as cost-push inflation.
Inflation is measured by measuring the price change of a basket of economic goods and services purchased by urban consumers. One widely used index is the Consumer Price Index (CPI), published by the Bureau of Labor Statistics. Other indices, such as the Personal Consumption Expenditures (PCE) index and the GDP deflator, take a broader range of consumer spending into account.
Some economists view a small amount of inflation as beneficial, helping to drive economic growth. Others view it as harmful, causing households to lose purchasing power and creating a disincentive for businesses to invest. Additionally, rising prices can make saving money difficult and increase the need for riskier investment strategies to grow wealth.
Inflation is a critical element of a healthy economy, but how deeply it affects people and businesses depends on the timing and direction of its movement. When inflation is stable, individuals’ purchasing power is protected and they can make plans with greater confidence.