Inflation is the overall increase in prices over time that reduces the purchasing power of a nation’s currency. It is measured by indices like the Consumer Price Index (CPI). Inflation affects everyone, but it hurts consumers most because their money can only buy fewer goods and services as prices rise.
The government keeps an eye on inflation rates to help tame it so that the economy can remain stable. If inflation is too high, it can cause people to spend less and delay purchases such as buying a new home or vehicle. This can lead to companies not producing as much which can hurt employment. It also can lead to interest rate increases which make borrowing more expensive.
Historically, the United States has had low and moderate inflation. However, inflation spiked during the COVID-19 pandemic and has been slowing down since then.
Inflation happens when a country’s central bank creates more money than the public’s demand for it. This can push prices up in what is called a cost-push effect. A rise in prices can also occur when the demand for products outpaces what can be produced, which is called a demand-pull effect. Inflation is bad for businesses because it makes their investments less profitable. It can also hurt workers because their salaries don’t adjust as easily to rising prices, which can make it harder for them to maintain a decent standard of living.
Many governments track several price indices to measure the rate of inflation. Often, these indices remove volatile components such as food and oil to get a more accurate picture of the overall inflation rate. This is known as core inflation. It is used by central banks to understand how the policies they’re implementing are impacting prices and the economy.