The inflation rate is the percentage increase in prices for a broad range of goods and services over a given period. It’s important to measure the overall impact of price changes because humans’ needs extend far beyond a handful of products: people need commodities like food grains, metals, fuel, utilities like electricity and transportation, and services such as healthcare, entertainment, and labor. A single value that represents the change in a basket of such products and services is the best way to capture the overall effect.
A high inflation rate can have a wide ranging impact, affecting consumers and businesses alike. For consumers, it devalues their money over time by making it harder to buy the things they need. For companies, it raises the cost of doing business by increasing their input costs—for example, higher prices for raw materials. It also makes it harder to keep wages and benefits stable, which can lead to worker frustration and loss of morale.
Inflation can be driven by either increased demand or increased production capacity. For instance, when a surge in government or central bank spending leads to an increase in the supply of money, it can boost demand and cause inflation, known as demand-pull inflation. When production capacities are disrupted, such as by war or natural disaster, they can create a scarcity of products and raise prices over time, known as cost-push inflation.
Because short run fluctuations in commodity prices can throw off a calculation of the inflation rate, most statistical agencies publish core measures that exclude volatile elements, such as food and energy. These measures are more representative of long run inflation trends and help policymakers to gauge the effects of their current monetary policies.
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