The rate of price increase in a country’s economy. The higher the inflation rate, the less purchasing power your money has — making it harder to afford things you need or want. Inflation can be hard to detect unless you compare prices from different periods. It can also vary by product, and can affect the value of a currency. A high inflation rate can be harmful to an economy, but a moderate one is generally considered beneficial for economic growth.
Inflation tends to affect low- and fixed income families the most, as they can’t always keep pace with rising costs. But the overall impact can be lessened if you save regularly, and choose investments that can keep up with inflation.
A number of factors can cause inflation, but the main cause is a mismatch between supply and demand. This can be caused by limited fuel supplies, or a relaxed monetary policy that circulates more currency than the economy can support. Other causes can include natural disasters or war that restrict production capacity, or structural factors like a lack of competition.
The government calculates the rate of inflation by comparing the price changes of a predetermined “basket” of goods and services, which are selected to represent what people buy on average. It then combines the changes in the cost of these items into a single percentage figure, to give an indication of the rate of price rises over time. This figure is called the consumer price index (CPI). Economists and central banks often focus on a measure that excludes food and energy, which are more susceptible to price volatility.