The rate at which prices increase or decrease can influence many facets of the economy — from people’s purchasing power to economic growth and even interest rates on national debt. Understanding and managing inflation is key to promoting a healthy, sustainable economy.
Typically, when prices rise, each monetary unit can buy fewer goods and services. For this reason, the emergence of high levels of inflation is generally considered a bad thing. The lowering of the purchasing power of currency can lead to economic stagnation and higher unemployment. Inflation can also make it harder to pay off loans because future repayments will have a lower value.
For these reasons, countries typically aim for low levels of inflation. However, this is not always possible. Inflation can spike for a number of reasons, including rising energy costs or supply chain issues. The resulting economic disruption can cause unemployment to rise and can erode consumer confidence.
The main way to track inflation is through a price index such as the Bureau of Labor Statistics’ Consumer Price Index (CPI). These indexes use data collected from a number of sources, including surveys of households. To make sure that the index covers all areas of spending, individual items’ prices are weighted according to how much of the average household spends on those items. Thus, food and housing-related costs are given more weight than something like recreation.
Inflation can be harmful for certain groups of the population, especially those who are reliant on fixed incomes such as retirees. Inflation can eat into the savings of these populations and can lead to belt-tightening as families attempt to manage their budgets. Recipients of Social Security benefits, for example, often receive cost-of-living adjustments to their monthly payments in order to stay ahead of inflation trends.
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