An inflation rate is the percentage that describes how quickly prices of a basket of goods and services are rising. The basket includes a number of items that are necessary for human life, including commodities like food grains and metal, utilities like electricity and transportation, and services like healthcare and entertainment. There are several government datasets that track price changes, but one of the most widely used is the Consumer Price Index (CPI) from the Bureau of Labor Statistics. This statistic is used by economists and policymakers to measure overall price trends, adjust income eligibility for government assistance programs, calculate cost-of-living adjustments for workers, and manage the national debt.
Generally speaking, moderately low rates of inflation are considered to be good for an economy. As prices rise, each monetary unit loses value and can buy fewer goods and services. For businesses, this can be beneficial, as it reduces the costs of raw materials and energy while also raising wages for employees.
High inflation, on the other hand, can be problematic. It can increase the cost of borrowing, as the value of future repayments decrease with inflation. It can also lead to economic stagnation, as businesses are unable to raise wages and hire new workers without increasing prices for their products and services.
One of the most common causes of high inflation is an expansion of the money supply, such as when a country issues massive COVID-19 relief packages to stimulate growth. This can cause a speculative bubble in commodity markets, which will eventually work its way through the production process into higher consumer prices. Core consumer inflation, which excludes the prices of food and energy, tends to be more stable and offers a clearer picture of long-term price trends.
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