Inflation is the rise in prices for goods and services that reduces the purchasing power of the currency. The inflation rate measures how quickly prices are rising and is typically expressed as a percentage of the price level from a certain point in time, often referred to as a “base year” or “100.” Statistical agencies use a basket of goods and services that people consume to determine the overall trend in prices. Prices for each item are then weighted so that items like food or gasoline have a higher influence on the overall index than, say, recreational activities. This results in a monthly and annual measure of inflation.
The rise in prices for a wide range of products and services has been driving the inflation rate to record highs not seen since the early 1980s. Higher rates of inflation benefit domestic producers by raising their profit margins and reducing the cost of imported raw materials, but they can also hurt consumers as prices increase faster than their incomes. In addition, investors who save see the real value of their savings erode over time, which can discourage saving and investing in future economic growth.
The rate of inflation varies by the specific items included in the consumer price index (CPI). To get a more accurate picture, analysts look at the core CPI, which excludes volatile energy and food prices that can be affected by special factors such as weather events or geopolitical turmoil.