The inflation rate, calculated as the percentage change in prices of a selection of goods and services typical of households, is an important statistic for individuals and businesses alike. For consumers, high inflation can mean that the money they earn from their jobs doesn’t go as far and may erode their purchasing power over time. For business owners, higher prices can increase the costs of their inputs, reducing profit margins. And for those on fixed incomes, high inflation can distort their purchasing power, making it harder to keep up with rising interest payments, such as mortgages and pensions.
Inflation is a slow decrease in the purchasing power of money and, as such, it isn’t always considered a bad thing. It helps keep consumer spending healthy, which is good for the economy, and it can also help lower the cost of borrowing by keeping interest rates low. It’s for this reason that the Federal Reserve has a target of 2 percent inflation, which is typically considered a healthy level of inflation.
Inflation is often measured by the Consumer Price Index (CPI) or the Personal Consumption Expenditures (PCE) price index, both of which are published by the Bureau of Labor Statistics and take into account a wider range of consumer spending than just food, utilities and gasoline. However, policymakers and financial market participants tend to focus on core consumer inflation, which excludes the prices of items set by the government and those that are most volatile and less reflective of longer-term trends, such as energy and food.