A country’s inflation rate is an important economic indicator that measures how much prices are rising overall. The rate of inflation decreases the purchasing power of a currency, meaning that one unit of money can buy fewer goods and services in aggregate than it could before. Inflation is generally viewed as harmful to the economy because it slows growth, increases costs for consumers, and reduces the value of savings. However, some segments of society are protected from inflation, such as those who own physical assets like real estate or stocks.
To determine the inflation rate, researchers track the prices of a “basket” of goods and services that are purchased by the average consumer. Each item’s price is then weighted based on how often it is bought and the relative importance of that good or service to the average consumer’s total spending. This data is combined to produce a single index that represents the overall level of prices. This is the type of index used by the Bureau of Labor Statistics to calculate the Consumer Price Index (CPI).
When all prices are rising at the same rate, it is considered a mild form of inflation called creeping inflation, which means that prices rise slowly but steadily. Other forms of inflation include walking or trotting inflation, where prices rise moderately but consistently, and running or galloping inflation, which is when prices increase significantly, such as above 3% per year. To better gauge the overall trend in inflation, researchers also use core inflation, which removes prices of energy and food from a basket of goods to help identify long term trends.