Inflation rate is the speed at which prices rise, and how that compares to previous periods. It’s the key economic factor that governments and financial markets keep track of, as it affects purchasing power.
National statisticians check the prices of a fixed “basket” of goods and services to get a monthly or annual inflation rate. The basket includes everyday items like a loaf of bread or bus ticket, as well as larger ones such as a car or holiday. This basket is called a price index, and the Office for National Statistics in the UK publishes its results as the Consumer Price Index (CPI). The US Bureau of Labor Statistics uses a different measure, the Personal Consumption Expenditures index, which takes into account a broader range of spending categories. It’s also possible to look at core inflation, which excludes volatile spending categories such as food and energy.
The rise in inflation can reduce the real purchasing power of people who use money, and it’s the main reason why government and businesses try to avoid high levels of inflation. People can protect themselves from the impact by saving their money in a bank or investing it, and by planning ahead for increased expenses with a mortgage that’s linked to inflation. They can also buy Treasury Inflation-Protected Securities (TIPS), which will increase in value with rising prices.
Inflation can be caused by both demand-pull and supply-push factors. Demand-pull inflation happens when household consumption accelerates more quickly than producers can respond with new goods and services. For example, as demand for cars recovered faster than expected following the COVID-19 pandemic, a shortage of semiconductors led to a surge in new car prices. Meanwhile, cost-push inflation can happen when the price of raw materials and labour increases before companies pass those higher costs on to end consumers.
About the Author
