The rate at which prices change can have big ramifications for individuals, businesses and economies. It influences people’s purchasing power, raises or lowers interest rates on debt and more. It can also redistribute wealth and create economic hardship for certain groups of people if it causes savings to lose value or erodes wages.
Understanding inflation rates can help you budget and save for the future. It can also help you know when it’s time to invest in asset classes that tend to perform well in inflationary times.
Inflation is a measure of the average change in the price of a basket of goods and services over time. To calculate the inflation rate, a comparison is made between the current price of the basket and the price at some previous date. This is measured as a percentage change.
A popular way to measure inflation is with the Consumer Price Index (CPI), which includes the price of a wide range of goods and services used by households in the United States. It is calculated by the Department of Labor using a number of complex formulas.
Other measures of inflation include the Wholesale Price Index (WPI), which covers goods at the wholesale level before they reach the retail market, and the Producer Price Index (PPI), which covers the prices paid by producers for their raw materials and services. These measures may vary slightly from one country to another.
Some economists consider a low, steady, predictable amount of inflation to be healthy for an economy. It encourages spending and investment and reduces the incentive to hoard money, as it will lose value in the future.