A country’s inflation rate is a measure of how quickly prices rise in its economy. The rate influences people’s purchasing power and therefore affects the economic growth of the country. Inflation is considered good if it’s stable, but too much or too slow can be detrimental to a nation.
The most popular inflation rate is the Consumer Price Index (CPI), which tracks the price changes of a basket of economic goods and services purchased by households, including food, transportation, education, recreation, medical care, housing, clothing and more. The Bureau of Labor Statistics calculates the CPI based on a sampling of around 700 products and services that consumers buy regularly, and it includes both everyday items and larger purchases such as cars and education.
When the demand for a particular product increases, the available supply decreases, and consumers are willing to pay more for it. This is known as demand-pull inflation and it’s one of the main causes of rising prices, which can also be caused by shortages of raw materials, increased production costs or government-imposed taxes on energy or other products.
When prices rise, each unit of currency buys fewer goods and services, which reduces the purchasing power of people in the economy. It can also make it hard for businesses to plan for the future, especially when their profits are impacted by rising prices. It’s important for investors to factor in a realistic inflation rate when creating their long-term financial plans.