The inflation rate is the percentage change in prices of a basket of goods or services over time. It is commonly used to determine the cost of living for consumers, to adjust salaries and wages, and to calculate benefits and pensions. It is typically measured over a year, but can be over shorter periods. Government agencies like the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis publish various price indices that track inflation. The most well-known is the Consumer Price Index (CPI), which includes a broad basket of products consumed by urban consumers. Other measures, such as core CPI, exclude food and energy, and can be more accurate in determining the impact of inflation on households.
Inflation hurts consumers the most, as their purchasing power declines over time. Their dollars buy fewer and fewer goods and services, making the same purchases more expensive. Consequently, they may postpone purchases or take out loans with higher interest rates. Inflation also affects companies, which must raise their prices to cover rising input costs for raw materials and other production inputs. If they over-react, however, they risk suppressing demand, which can depress revenues and lead to lower profit margins.
Lastly, investors in tangible assets, such as property or stocked commodities priced in the local currency, might see some benefits from high inflation, as their assets will appreciate in value over time. However, this is an investment strategy that is risky, as there is no guarantee the inflation rate will continue to increase indefinitely.