Inflation rate is a measurement of the annual change in the price level of goods and services bought by consumers. This measure is an important tool for central banks and investors, as it influences the value of a nation’s currency, and the purchasing power of the money in an economy.
Humans need a vast and diversified array of products and services to live; measuring the price changes for each individual product is complex, so an index that measures the average increase or decrease in prices across a predetermined basket of goods (the CPI does this) provides a more rounded picture of the overall impact on a nation’s citizens. An inflation index also allows the price rise or fall of one component to cancel out the price changes of other components, reducing distortions in the data.
The initial price burst that followed the COVID-19 pandemic — driven by pent-up demand, supply chain issues, and government spending – drove headline inflation in 2022 to 9.1 percent in the United States. This rate has since cooled, though, and as of January 2025 is only about 3 percent.
Various factors contribute to inflation, including increased demand for a good or service, higher production costs related to raw materials and labor, market disruptions, fiscal and monetary policies, and geopolitical conflict. A fast pace of inflation can damage economies, as it erodes consumer purchasing power and reduces the value of savings.
Core inflation focuses on the most persistent price trends and excludes the prices set by governments and the prices of products impacted by temporary supply conditions. This more granular and stable measure is watched closely by policymakers. Inflation impacts everyone, from workers to executives and families. Businesses must factor in the possibility of future inflation when pricing their goods and services, which can eat into profits. And for those on fixed incomes, inflation can make saving and investments less valuable in real terms.