When people discuss inflation, they’re usually talking about the rate at which prices are rising for a wide range of goods and services. That’s why the BLS produces so many price indices, which allow policymakers and business leaders to compare prices for hundreds of products from milk and gas to computers and clothes. Inflation can affect consumers’ purchasing power, economic growth and raise or lower interest rates on debt.
A low and stable inflation rate is considered good for a country’s economy. It can make debt easier to repay and it increases the value of assets like real estate and stock portfolios. On the other hand, high inflation can reduce the purchasing power of a currency, and that can lead to economic slowdowns and even recessions.
The causes of inflation vary, but it often comes down to an imbalance between two different economic forces: supply and demand. Supply describes how much of a good or service is available at a given price, while demand refers to how much people are willing and able to buy that good or service. When demand outpaces supply, that’s when inflation is likely to occur.
Governments track consumer inflation by calculating the Consumer Price Index (CPI), which is used to calculate cost-of-living adjustments for employees and to adjust Social Security benefits. Producers track wholesale inflation using a variation called the Producer Price Index (PPI). Both of these measures tend to foreshadow consumer inflation, as higher prices at the production level are passed along to consumers in the form of higher product and service prices.
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