An inflation rate is the change in prices of a basket of goods and services consumed by households. Typically, prices rise over time, but they can also fall (a situation called deflation). The Bureau of Labor Statistics uses several price indexes to track consumer and producer pricing. It publishes these indexes monthly, including a core version that excludes volatile foods and energy to focus on underlying trends. The Federal Reserve targets an annual inflation rate of about 2 percent, and the Fed sets its monetary policy in light of these goals.
Inflation has benefits and costs, and the degree to which a country experiences each depends on how fast and how long prices increase. When prices increase faster than wages, it’s known as demand-pull inflation. This is often caused by increased demand for goods, such as rebuilding after the COVID-19 pandemic, and supply constraints, like a shortage of semiconductors.
When demand exceeds the economy’s ability to produce, it leads to rising prices and higher interest rates. A high rate of inflation can erode people’s purchasing power and can make it more expensive to buy big-ticket items, such as homes and cars. It can also hurt companies’ profit margins and increase the cost of borrowing. As a result, many investors view an inflation rate as a risk factor to consider when making investment decisions. They may seek opportunities in sectors that are less vulnerable to price increases. Inflation also tends to reduce the value of currency over time, which can hurt long-term savings and retirement plans.