When inflation rates are high, everyday consumers notice it. They pay more for groceries, utilities and gasoline. They see higher prices for college textbooks and tax return preparation services. Executives and corporate leaders also deal with higher costs, re-examining pricing strategies and figuring out how to protect margins. And while a little bit of inflation is considered part of a healthy economy, too much can make it hard for people to keep spending or businesses to hire, making the overall economy weaker. The Federal Reserve’s goal is to keep inflation around 2 percent annually.
Inflation rates measure how fast the prices of a standardized basket of goods and services are rising. Statistical agencies create an index of the value of this basket each month and compare it to the index of the previous month or year. This lets them track the rate of price increases, and it allows economists to gauge the impact on the economy.
While the exact causes of inflation vary, there are two main types. “Demand-pull” inflation can occur when demand for products exceeds the economy’s ability to produce them. This can be exacerbated by a number of factors, including low interest rates, increased money supply, high raw materials costs, labor mismatches and geopolitical conflict.
Because these kinds of factors can make it difficult to measure inflation accurately, policymakers tend to focus on broader measures, like the Personal Consumption Expenditures (PCE) price index published by the Bureau of Labor Statistics. This index takes into account a more diverse range of household spending and includes a weighting for healthcare, helping it better reflect the needs of consumers.