Inflation rates measure the average rate at which prices for a group of goods and services rise over time. A nation’s central bank uses inflation as an important tool in its effort to achieve economic stability and employment. The Federal Reserve typically aims to “anchor” inflation expectations at around 2 percent on average over time.
A nation’s government keeps track of inflation by using a national price index. The Bureau of Labor Statistics (BLS) features the Consumer Price Index (CPI), which combines the prices of a predetermined basket of goods and services, such as clothing, food, gasoline and housing. The BLS also has a trimmed-down version of the CPI known as core inflation, which strips out the volatile components like food and oil to better measure underlying long-run trends in price changes.
When a country experiences high inflation, the purchasing power of money in that country diminishes. This can make it more difficult for businesses to budget, for investors to invest in companies and for individuals to save.
Inflation is typically caused by either a demand shock or supply shortages. A demand shock may occur due to increased government spending and higher private household spending, which leads to more consumption and hence greater inflationary pressures; or a slowdown in production that leads to a shortfall of some goods and services. Supply shortages may be caused by natural disasters, geopolitics or other events that cause raw material prices to go up, and in turn push up the prices of finished goods and services.