Inflation rate is the percentage that describes how quickly prices are rising. While there are many different government datasets that track price fluctuations, the most common is the Consumer Price Index (CPI). CPI tracks price changes for a basket of goods and services that represent what 90% of the country’s population actually buys, which means it provides a clear picture of how inflation impacts everyday living expenses.
If prices increase faster than household incomes, consumers’ purchasing power erodes. To compensate for this loss, consumers may switch to cheaper substitutes, search harder for bargains or even put off purchases. In the end, higher food, utility and gasoline costs eat into disposable income, which can dampen economic growth. Inflation can also affect businesses, because it raises the cost of importing raw materials and equipment, makes existing inventory more expensive to hold and forces companies to raise prices to cover those costs.
The Federal Reserve is largely responsible for controlling inflation in the United States, and one way it does this is by setting an interest rate at which banks borrow money from each other or from the Fed. The higher the interest rate, the more expensive it is to lend, which drives down demand and slows the rate of price increases.
However, inflation can also be caused by local or state governments enacting policies that directly influence the supply of certain goods and services. For example, restrictive zoning requirements can limit the availability of housing, which in turn drives up its prices.