The rate at which prices of goods and services rise over time is known as inflation. It affects both need-based expenses (like housing, food and utilities) and want-based expenses (such as clothing, entertainment and travel). Inflation reduces the purchasing power of currency and can make saving money or investing in assets less rewarding.
The main way governments, economists and business leaders track inflation is by using price indices. These track the price changes of a “basket” of goods and services that represents what most people buy. For example, the Consumer Price Index (CPI) reflects the price fluctuations of items that most people use in their daily lives, such as foods, clothing, energy and healthcare. The CPI is updated at regular intervals to reflect the changing prices of new and existing items.
Inflation can be caused by a variety of factors. For example, rising food prices can be driven by weather conditions, crop yields and international market trends. Energy prices are also volatile, influenced by geopolitical events, commodity markets and government policies. Inflation can also be accelerated by cost-push factors, where the rising costs of raw materials and wages cause manufacturing companies to increase their prices for end consumers.
Unevenly rising prices can lead to discontent among consumers, especially when they are higher than wage increases, as occurred during the COVID-19 pandemic. High inflation can also harm businesses by reducing their profit margins and eroding the value of money they hold. In addition, uncertainty about future purchasing power can deter investment and discourage savings.