The rate at which prices change has a profound impact on many facets of the economy, from people’s purchasing power to economic growth to the cost of servicing national debt. Getting inflation under control is critical for businesses and consumers alike.
Inflation is measured by tracking price changes for a basket of economic goods and services—typically a measure like the Consumer Price Index (CPI) from the Bureau of Labor Statistics. The index reflects the average change in prices paid by urban consumers and is usually the number you’ll see quoted in news reports. Statistical agencies also report measures of “core” inflation, which excludes the most volatile components such as food and energy that are influenced by short term supply and demand conditions in those markets.
As the COVID-19 pandemic receded and economies opened up again in 2021 and 20, wages rose and prices increased, spurred by a low unemployment rate that created demand for workers to fill jobs and purchase goods and services. This pressure to hire and increase pay also drove up the cost of raw materials, which firms then passed along in their pricing for products. This is known as cost-push inflation.
A little bit of inflation is good for consumers, as it increases their spending power by reducing the value of the dollars they have in savings and investments. But too much can be painful, as it erodes the value of money they receive in their paycheck or from bank accounts and complicates saving for a rainy day.