The inflation rate describes the pace at which prices are rising, and it has a profound impact on the economy. It’s one of the biggest factors affecting people’s purchasing power, economic growth and the cost of borrowing. High inflation devalues a nation’s currency and reduces the buying power of people’s savings and income. Consumers are the main group that loses purchasing power as a result of inflation, since they spend most of their money on food, utilities and gasoline, all of which tend to increase at a fast rate when inflation is high. As a result, their money doesn’t go as far, and they may choose to buy cheaper substitutes or delay major purchases. The government tracks inflation by monitoring the price changes of a predetermined basket of goods and services that represents most of what people buy in a typical year. The Bureau of Labor Statistics publishes this data as the Consumer Price Index, or CPI. Another key measure of inflation is the Personal Consumption Expenditures Price Index, or PCE, published by the Bureau of Economic Analysis.
Businesses also feel the effects of inflation, especially if they have to pay higher prices for raw materials like coal or oil or to transport their products from source to destination. The challenge for many is to find the right balance between raising prices enough to offset higher input costs and not suppressing demand, which could lower revenues and profit margins.