The inflation rate is the measure of how fast prices are rising. It can affect a variety of facets of the economy, from people’s purchasing power to interest rates on national debt. Keeping inflation at a low, steady or predictable level is generally considered to be good for the economy.
To calculate the inflation rate, the Bureau of Labor Statistics checks the prices of a set of goods and services purchased by urban consumers (and then weights them accordingly). The basket includes everyday items like bread and milk, as well as larger ones such as a car and vacations. The result is a single number that represents the average change in price over time for the entire basket. The CPI is the primary inflation metric that is reported in news reports, although other measures exist, such as the personal consumption expenditures price index, which takes into account a much larger range of consumer spending and is weighted using data acquired through business surveys.
Inflation occurs when production costs for a good or service rise due to increased raw materials, labor costs or market disruptions that can be exacerbated by higher demand and fiscal and monetary policy. This type of inflation is sometimes called “demand-pull.” Companies can also cause their own inflation, particularly if they manufacture products that are in high demand and have limited supply.
Because of this, inflation rates can vary by area. Core consumer inflation, which excludes prices set by the government and volatile goods and services that are more affected by temporary supply conditions, is watched closely. This allows for a more accurate picture of underlying trends in inflation.