A country’s inflation rate is a key economic indicator, telling you how fast prices are rising on average. It affects everyone, but especially lower-income consumers. It can lead to belt-tightening by households and can also reduce the value of money in an economy, making a given amount buy fewer goods and services than it would otherwise.
Inflation can affect every sector of the economy, from food and utilities to cars and cosmetics. It can also affect interest rates on the national debt, which in turn can have ripple effects throughout the economy. Understanding and properly managing inflation is an essential component to promoting a healthy, sustainable economy.
The inflation rate measures how much prices are increasing on average over a given period of time, usually on an annual basis. The figure is calculated by examining a basket of goods and services that represent a wide range of spending categories. The prices of the basket are weighted to account for the amount each item is consumed by the average household. This is the same method used to calculate the Consumer Price Index (CPI). The Bureau of Labor Statistics also publishes the Personal Consumption Expenditures price index, which takes a more granular look at what people are spending their money on, including healthcare and housing.
There are many reasons prices can increase, ranging from government spending to high raw materials costs to supply-chain disruptions. Pent-up demand and the repercussions of the COVID-19 pandemic, as well as Russia’s unprovoked invasion of Ukraine, have pushed prices higher recently, leading to an elevated inflation rate. This is a classic case of “demand-pull” inflation, in which the demand for products outstrips the economy’s ability to produce them.