The inflation rate measures the percentage increase in prices of a basket of goods and services consumed by households. Statistical agencies measure price changes on a monthly or annual basis and then compare those values to get the inflation rate. An increase in the inflation rate means that prices are rising more quickly than they used to.
An increase in the inflation rate can impact various facets of an economy, including lowering people’s purchasing power and reducing the value of money. The Federal Reserve has a target inflation rate of about 2%, and investors often speculate on whether the current inflation rate will come close to this figure.
Inflation can occur in a number of ways, but it’s usually triggered by new money entering the economy and being spent by those with spending power. As the money circulates, it affects relative prices, wages, and rates of return. The prices of commodities, utilities like electricity and gas, and other input costs for businesses also rise as the result of inflation. This is known as cost-push inflation.
Consumers can lose purchasing power as a result of inflation, especially when prices for essentials such as food, housing, and transportation rise. In this case, people might be forced to make sacrifices or delay purchases in order to maintain their standard of living. Businesses may have to spend time and resources updating materials in which they display their prices, such as menus or catalogs. In addition, employees’ salaries may be indexed to inflation. Real assets, such as property or precious metals, typically retain their value during inflationary periods, and so can help people cushion the effects of higher prices on their purchasing power.
About the Author
