The Purchasing Power of Money
A little bit of inflation is considered to be a good thing, keeping the economy healthy so businesses can keep hiring and consumers’ paychecks can grow. But if inflation gets too high, it can feel a lot like taking a pay cut, and can make saving for emergencies or investing for retirement more challenging.
The Federal Reserve works to control inflation to ensure that the US has a stable economy and people can continue to get jobs and spend their money. One way they do that is by “anchoring” inflation expectations at about 2 percent on average each year.
Inflation rates are calculated based on the price changes of items in a predetermined basket of goods and services. The Bureau of Labor Statistics assigns weights to each item, based on how prevalent it is in a consumer’s budget. So, for example, the rising prices of eggs are reflected in the overall inflation rate.
There are three regular reasons for inflation:
Demand-pull inflation:
This type of inflation happens when the demand for goods or services exceeds their supply. When that occurs, the items will rise in price — as long as the company can pass along the higher production costs to consumers. This is often the case with companies who manufacture popular products that consumers are willing to buy.
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