When you hear the word inflation rate, you probably think about how prices are rising and what it means for your purchasing power. But the reality is, the inflation rate is just one of many economic indicators that affects the economy. It influences everything from people’s spending power to interest rates on the national debt. In fact, managing inflation is vital to a healthy economy.
The inflation rate measures the average annual price increase of a basket of goods and services bought by consumers in a country, such as food, clothing, utilities and entertainment. The basket is compiled by statistical offices or other similar institutions based on extensive consumption surveys. It is updated on a regular basis to reflect changes in consumer habits, new products and services, and the disappearance of old ones.
While the specifics of how the inflation rate is calculated varies across countries, the consensus is that sustained inflation occurs when the money supply is growing faster than economic output. A wide range of factors can contribute to high inflation, including:
While there are some goods and services that don’t necessarily change in price every day, most of them do, at least periodically. This unevenly rising price environment erodes the purchasing power of everyone’s disposable income. As a result, it leads to higher living expenses and makes it harder for families and businesses to meet their financial goals.
About the Author
