Inflation is a rise in prices that reduces the purchasing power of money. The inflation rate is a percentage that measures how fast prices are rising in an economy. The best-known measure of inflation is the Consumer Price Index (CPI), which tracks the price changes in a large “basket” of goods and services that people use every day. The CPI is calculated by measuring the prices of a wide range of categories from over 200 different products and services. The most important categories are weighted according to their importance, and the overall result is a snapshot of how much it costs for average consumers to buy a basket of goods and services.
The CPI is generally viewed as the best indicator of inflation for a country because it includes all kinds of items, and it is updated monthly. In the United States, it is a key piece of data that influences monetary policy decisions made by the Federal Reserve.
High or unpredictable inflation is generally viewed as unhealthy for economies. It slows economic growth by devaluing the purchasing power of money, and it makes it difficult for households and businesses to budget or plan long-term. It also hurts the performance of assets like stocks, as it can reduce the return on investment in dollars over time.
One kind of inflation is called cost-push inflation, which occurs when increases in the supply of money and credit work through the market for key commodities, driving up their prices. This can happen when there is a sudden spike in demand for commodities due to events like the COVID-19 pandemic, or when there are disruptions to the production chain.