Consumers are the primary group that loses purchasing power when inflation rates rise. Their money doesn’t go as far, so they have to think twice about buying bigger-ticket items such as cars and appliances. Higher prices can also mean higher interest rates on loans, which makes it more expensive to borrow. In addition, high inflation rates devalue currency and interfere with the ability to save. This is why central banks of developed economies, including the Federal Reserve in the United States, monitor inflation rates.
The most common measurement of inflation is the Consumer Price Index (CPI), which tracks the average change in the cost of a basket of goods and services purchased by urban consumers, such as food, housing, apparel, medical care, recreation, transportation and communication. The Bureau of Labor Statistics also publishes the Personal Consumption Expenditures Price Index, which takes a broader approach to consumer spending and uses data acquired through business surveys.
Rising prices typically occur when the demand for a good or service exceeds the available supply. As a result, companies may increase their prices, which can trigger demand-pull inflation. For example, a surge in the demand for new homes can lead to a boom in construction firms that sell houses, which can then raise their prices to take advantage of this newfound popularity.
Other causes of inflation include increased production costs associated with raw materials and labor, market disruptions, higher consumer demand, and certain fiscal and monetary policies. The lower production costs of goods and services produced locally can also contribute to localized inflation.