The inflation rate is the percentage increase in prices for a basket of goods and services, over time. The basket is surveyed by statistical offices and other institutions and it’s updated at regular intervals to reflect changes in consumer tastes, new products or the disappearance of older ones.
The underlying cause of inflation is that as economies grow, demand for goods and services increases. That typically drives up prices a little bit as suppliers ramp up production to meet that demand. Over time, a little bit of inflation can actually be good for consumers. Workers with a fixed income like wage earners get higher wages that keep up with the price rises, and they’re able to continue spending in the economy. That virtuous cycle is why most policymakers and financial market participants favor mild to moderate inflation.
A more rapid and unpredictable rate of inflation can cause real problems for households and the wider economy. People may hoard goods and other assets as they expect prices to fall, and this can lead to shortages that create panic. In addition, a falling purchasing power makes it harder for people to afford their mortgages, and this can lead to evictions and even revolutions, such as those in Tunisia and Egypt in 2010.
The Bureau of Labor Statistics reports a number of price indices including the consumer price index (CPI), the Producer Price Index and others. Policymakers and other market participants often pay particular attention to core inflation, which excludes the volatile prices of food and energy because they can change rapidly due to supply and demand conditions in specific markets.