A measure of how much prices for goods and services are rising over time, inflation is typically considered bad for the economy. It makes it more expensive for consumers to buy things, and it is also difficult for businesses to keep pace with demand. That’s why it is important to keep a close eye on both relative and core consumer inflation—the latter excludes prices set by the government and items that are highly volatile due to seasonal factors or supply conditions.
The most common way to calculate inflation is to check the year-over-year change in the consumer price index (CPI), which tracks around 700 individual products that are grouped into categories such as food, clothing and transportation to see how much prices have gone up or down. The CPI is often compared to the gross domestic product deflator, which takes into account more comprehensive economic measurements to get a better idea of overall inflation.
Inflation can be caused by too much money in the economy chasing too few goods—often described as demand-pull inflation, in which people spend more and are willing to pay higher prices—or by high production costs, such as during wartime or natural disasters, when producers may raise their price tags. Inflation can also occur when a central bank prints too much money.
People often seek shelter from inflation through real assets that are able to retain their purchasing power, such as gold and property. Investors can invest in Treasury Inflation-Protected Securities (TIPS) or I bonds, which are linked to the CPI. The inflation rate is also important for companies to consider when setting salaries and wages for employees, as it can affect the amount of money a worker will need to repay loans in the future.
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