A country’s inflation rate is a measure of how much prices for a specific set of goods and services are increasing over a period of time, typically a year. The most widely used indicator is the consumer price index (CPI), which tracks prices of a fixed basket of goods and services purchased by typical households, and which includes categories such as food, energy and shelter. The BLS reports CPI monthly, dating back to 1913.
Inflation is generally viewed as undesirable, but its impact is complicated. High inflation can reduce the purchasing power of currency in a economy by distorting relative prices, wages and rates of return on investments. Inflation also makes it difficult for businesses to plan, as prices and costs are changing at a different pace.
However, inflation can be beneficial. For example, individuals who hold tangible assets priced in their own currency like property and stocked commodities may benefit from inflation as they can sell their goods at higher prices. Similarly, businesses who invest in risky projects or companies may hope for high inflation rates as this will boost the profitability of their operations.
For policymakers, understanding and interpreting the effect of inflation on an economy requires more than just monitoring one or several price indexes that track changes in the cost of specific products and services. Instead, the Federal Reserve evaluates inflation through the use of a number of different indexes that track a broader range of goods and services.
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