The rate at which prices rise can affect many facets of the economy, from individual purchasing power to raising or lowering interest rates on the national debt. Understanding and tackling inflation can help promote economic growth while protecting savings and the purchasing power of future income.
Consumers represent the primary group who stands to lose purchasing power as a result of rising prices, since their money won’t go nearly as far. This is why it’s important to keep a close eye on the rate of inflation, as well as inflation expectations, which indicate the direction prices are heading in the near term.
To get a better picture of the overall price pressures impacting consumers, government agencies like the Bureau of Labor Statistics produce a number of consumer price indexes. The most popular is the Consumer Price Index (CPI), which provides a single value representation of the increase in prices for a set of goods and services representative of what individuals buy and use on a daily basis. The CPI is also used to calculate cost-of-living adjustments for workers and to adjust the benefit levels of social security recipients.
Inflation can be driven by a variety of factors, from pent-up demand to supply chain challenges and even geopolitics. It can also be caused by a strain on an economy’s production capacity, which is referred to as “demand-pull” inflation. The goal for policymakers is to find the right balance between boosting demand when necessary and causing excessive inflation.
About the Author
