An inflation rate is a measure of price growth for a broad basket of goods and services. It is calculated by subtracting the annual Consumer Price Index (CPI) from the CPI in the previous year and multiplying it by 100.
The rate of inflation can have many implications, from the cost of living for individuals to how much people can afford to invest and save. It also has an effect on the economic growth of a nation and how much money is needed to pay for government programs, such as Social Security.
There are several underlying causes of inflation. The most common is too much money chasing too few goods, which can happen when the amount of money a currency is printed outpaces the economy’s ability to produce goods and services. This is known as demand-pull inflation. Other causes include price shocks, which occur when certain events cause prices to rise suddenly. Examples of price shocks include wars, natural disasters and supply chain disruptions. This is called cost-push inflation.
Businesses care about inflation because it affects their operating costs and the purchasing power of consumers, which can impact their profitability. A low, steady and predictable inflation rate is typically considered good for an economy because it signals healthy demand. Consumers can make more informed saving and investment decisions if they know what the long-term inflation rate is. For example, if they know that inflation is 2 percent annually, they can factor it into their savings plans and debt payments.
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