The inflation rate is a measure of how much prices are rising, as measured by a basket of goods and services consumed by households on average. Every month, statisticians check the prices of a set of items in that “basket” and then compare them to the previous month and year. The difference in the index’s value represents the rate of inflation.
The effects of inflation are felt by both consumers and businesses. For consumers, inflation erodes the purchasing power of their savings, and it can lead to belt-tightening and pessimism about the economy. On the other hand, businesses that have to increase their production costs to meet consumer demand are able to pass those higher costs on in the form of price increases for the goods and services they produce. That can spur spending, boost economic growth, and create jobs.
Inflation was once viewed as something to be avoided, but it is now considered to be a necessary component of a healthy economy. The trick is to keep inflation at a stable level, which is why central banks and financial market participants monitor the rate of inflation so closely.
There are many drivers of inflation, including a shortage of goods, excess printing of money, and pent-up demand. These can all cause short-term bouts of high inflation. However, sustained periods of high inflation can lead to hard-to-control price spirals. Moreover, higher inflation can encourage people to save instead of investing, which can exacerbate the problem.
About the Author
