A higher inflation rate erodes the buying power of money, making it harder for consumers and companies to meet their financial goals. Fortunately, understanding the causes of inflation and how to manage it can help.
Inflation is a measure of the change in prices that people purchase and pay for goods and services, and how quickly those prices rise or fall. The government determines the inflation rate by checking the price of a “basket” of items that represent what consumers actually buy on average. Then it compares that basket’s price from one month to the next or from year to year to find out how much prices are rising or falling.
To get a more accurate picture of long-term trends, statisticians often exclude food and energy prices from their measurements, which are prone to sharp short-term price fluctuations. This is known as core inflation and it gives a more stable indicator of price trends.
When consumers demand more goods and services, companies may have to increase production or hire more workers. This puts a strain on the overall economy, leading to higher unemployment rates and potentially lower economic growth. However, it also provides corporations with more leverage to raise prices and earn higher profits in the long run, as explained by the economic principle of supply and demand.
Unevenly rising prices reduce the purchasing power of consumer income, and that’s one of the primary reasons why many Americans are seeing their paychecks don’t stretch as far as they used to. The good news is that there are a number of factors that can affect the pace of price changes, including global events, currency fluctuations and monetary policy.