Every year, prices should be rising in a healthy economy. A little inflation helps keep businesses profitable and consumer paychecks growing, making it a key metric tracked by central banks, economists, and government officials. The Federal Reserve, for example, aims to achieve an annual inflation rate of around 2 percent. This is the goalpost that many other countries also use. To determine the overall rate of inflation, the Bureau of Labor Statistics (BLS) tracks a basket of goods and services that people purchase regularly. It excludes food and energy prices because those prices can be volatile. Known as “core” inflation, these numbers are more accurate and reflect a more comprehensive look at overall price trends.
The pace at which prices rise can have a big impact on consumers’ wallets, especially if it happens too fast. Specifically, it can reduce purchasing power by pushing up the prices of the products that make up a household’s budget. That can lead to strained household finances or higher debt levels. It can even lead to economic stagnation, which is a serious problem for countries that are trying to grow and compete in the global marketplace.
The overall rate of inflation may be influenced by changes in the supply or demand for certain goods and services. It can also be caused by the resale value of currency and other assets. This type of inflation is called “demand-pull” because it occurs when consumers’ demand for goods and services outstrips production, causing prices to rise. This kind of inflation is generally less harmful than cost-push inflation.