The inflation rate is the percentage change in the prices of a basket of consumer goods and services over time. Government agencies such as the Bureau of Labor Statistics produce a variety of price indices to help policymakers, business leaders, and consumers track overall price movements. The most commonly referenced is the Consumer Price Index (CPI), which reports on changes in the prices paid by urban consumers for a fixed set of goods and services. Other popular indices include the Personal Consumption Expenditures (PCE) price index and the Wholesale Market Inflation Index (WPI).
Inflation can feel like a pay cut to consumers, as they see their purchasing power erode over time. High inflation can also hurt businesses, as it makes it harder to make investments and impedes productivity.
A little bit of inflation can be good, as it helps the economy grow by increasing demand for products and services. However, if the pace of increase becomes too rapid, it can become difficult for consumers to keep up with rising costs.
Pent-up demand, supply chain issues, and geopolitical conflict pushed inflation up to 9.1 percent in 2022. But actions by the Federal Reserve helped tame inflation to a steady 2.4 percent by January of 2024. Inflation has been stubbornly above the Fed’s target of 2 percent since then. Inflation is an important economic indicator, so it’s worth understanding why it matters and what impacts the rate of increase. This article will provide an overview of inflation, how it’s measured, and why it’s important for businesses and individuals alike.