The rate at which prices rise can affect many facets of the economy, from people’s purchasing power to interest on the national debt. Managing inflation is a major component of a country’s monetary policy, and the Federal Reserve has taken steps to tame inflation in recent years. Pent-up demand, supply chain issues, and global events like COVID-19 and the war in Ukraine contributed to a sharp increase in the United States’ annual rate of consumer price inflation in 2022, but action by the Federal Reserve brought it back down to 2.4% in January of 2023.
Various measurements of inflation exist, but the most widely-reported is the Consumer Price Index (CPI). The CPI calculates the change in the prices of a predetermined basket of items that represents what a typical household spends on average each month (eg a loaf of bread, a bus ticket, and books). These price changes are then weighted based on relative spending by households on these categories. Other measures of inflation, such as the Personal Consumption Expenditures (PCE) price index, take a more comprehensive look at consumption trends and are weighted using data acquired through business surveys.
Statistical agencies also report a measure of core inflation, which strips out the most volatile components of a broad price index like CPI (eg food and energy). Because these prices are often driven by short run supply and demand conditions in specific markets, core inflation can give a more accurate picture of a longer term trend.
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