A little bit of inflation is good for consumers because it keeps the economy growing, allowing businesses to keep hiring workers and bumping up salaries along the way. Too much inflation, however, feels like a pay cut that can make saving for an emergency or investing for retirement tougher. Inflation also impacts everything from economic growth to interest rates and monetary policy.
To measure inflation, statisticians look at the average price changes of a basket of goods and services purchased by households. This basket of items is typically compiled by statistical offices based on extensive consumer surveys and analyses. Statisticians then compare the price index from one period to the next to get a monthly rate of inflation, and they compare prices from year to year to get an annual rate of inflation.
The price index used for measuring consumer inflation can be adjusted to exclude prices set by government agencies and products with very volatile price components, such as food and energy. Core consumer inflation focuses on the most prevalent costs for households and may be used to guide economic policies.
There are several different causes of inflation, and a country’s monetary policy can play a critical role. For example, in the COVID-19 pandemic, high oil prices led to higher gasoline and electricity costs, which in turn led to an increase in consumer prices. Inflation can also be caused by cost-push or demand-pull factors. When demand for products outpaces the supply, manufacturers are forced to raise their prices to cover production and shipping costs. This can lead to a spike in consumer prices and erode the purchasing power of currency.