The inflation rate is the percentage increase in prices compared to the previous period. It can have many effects, including eroding the value of a currency, making a representative basket of goods and services more expensive, reducing people’s purchasing power and decreasing wages, which then affects consumption, spending, and economic growth.
Inflation is often a negative phenomenon, but it can also be beneficial when the economy is slowing and needs a boost. A slight rate of inflation can encourage consumers to spend and stimulate the economy, as well as help businesses make investments that would otherwise be difficult to justify. However, when inflation is too high, it can deprive consumers and workers of the purchasing power that they deserve, making goods and services more expensive and creating inefficiencies in the market.
The Bureau of Labor Statistics measures inflation using the Consumer Price Index (CPI), which monitors the average change in prices paid for a number of goods and services, such as food, clothing, shelter, medical care, recreation, transportation, communication, and education. Other metrics measure inflation more broadly, such as the Gross Domestic Product (GDP) price index, which includes the prices of all the goods and services that go into a nation’s production.
Individuals on fixed incomes may be particularly impacted by high inflation rates, which reduce the value of their money. For example, Social Security beneficiaries receive cost of living adjustments to their benefits each year, based on the CPI.