The inflation rate is a key statistic that influences the purchasing power of consumers, companies and investors. High rates of inflation reduce the value of a currency, while lower ones may make it easier to invest and do business. The inflation rate is often influenced by central banks through monetary policy.
The official measure of inflation is the consumer price index (CPI). It tracks prices for a basket of goods and services that are typical of household consumption in an economy. The basket is determined by statistical offices and similar institutions based on extensive consumer surveys. The basket items are weighted according to their importance or “share” of the average household’s expenditures. Thus, a change in the price of a given good or service is multiplied by its relative share of total spending to arrive at a percentage change in the CPI.
In the United States, the Bureau of Labor Statistics reports monthly on the CPI. USAFacts standardizes the data to provide national and regional inflation measures. A separate inflation measure, the Personal Consumption Expenditures Index or PCE, is calculated by the Bureau of Economic Analysis, part of the US Department of Commerce, which also calculates Gross Domestic Product, or GDP. The Federal Reserve uses the PCE to set its inflation target.
High inflation is a concern because it reduces the purchasing power of money, meaning that for every dollar you have today, you can buy less tomorrow. Unevenly rising prices also reduce real incomes, a phenomenon called “cost-push inflation.” This is a situation where the higher prices of raw materials or of labor, which are required for production of certain final products, force companies to pass along these increased costs to consumers.
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