A little bit of inflation is usually a good thing, because it allows you to buy more goods and services for the same money. But a lot of it can feel like a pay cut, and can cause serious problems for people who rely on fixed incomes such as pensions and Social Security benefits to survive. The rate at which prices rise is called the inflation rate, and it’s calculated by measuring changes in a basket of items that most people use, such as food, clothing, transportation and utilities.
Government agencies such as the Bureau of Labor Statistics produce price indices to help policymakers, business leaders and consumers track overall price movements. The most commonly used measure is the Consumer Price Index (CPI), which tracks the average change over time in the prices paid by urban consumers for a fixed basket of goods and services. The CPI is also widely used to calculate cost-of-living adjustments for workers and adjust benefit payments for federal transfer programs such as Social Security.
The CPI is typically supplemented with a core inflation measure, which removes the prices of food and energy because they are more volatile than other elements in the basket. This helps policymakers and financial markets to better identify longer term trends in the prices of the things that people buy and use. The McKinsey Inflation ForecasterTM uses the core inflation measure to provide a view of long-term inflationary pressures on global economies.
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