Inflation is a measure of the average change in prices paid for a large and diversified set of goods and services over time. It is most commonly measured by the Consumer Price Index (CPI), published monthly by the Bureau of Labor Statistics. It provides a way to see the impact of price increases on a consumer’s overall costs and standard of living, as it compares the price of a basket of products in one period to the price of that same basket in the same period one year earlier.
Consumers care about inflation because it directly affects their costs and their purchasing power. Businesses carefully watch the price of raw materials and labor, and they take into account the effects of inflation when setting wages and planning for future growth. Inflation also impacts taxes, government spending and programs, and the level of interest rates. A low, steady and predictable rate of inflation is generally viewed as positive for economic health.
Managing inflation is important because it helps to keep the economy’s supply and demand in balance. High inflation harms savers by eroding the purchasing power of the money they have saved, and it hurts borrowers by reducing the real value of their debt. A moderate amount of inflation, however, can help boost an economy’s growth and provide benefits for both borrowers and savers.