Inflation rate is the change in prices of goods and services tracked by government-produced consumer price indexes (CPI). It is an important measure because it captures the cost of everyday items people use to live. The inflation rate can have a significant impact on the purchasing power of money. Inflation also affects investment returns. The goal of most investors is to increase their real income over time, and inflation can chip away at that goal if investment returns are not kept up with the inflation rate.
Many things can cause inflation, including limited fuel supplies and a relaxed monetary policy that circulates too much money relative to the economy. Events that raise production costs or disrupt supply chains can also lead to inflation. Inflation usually hits lower-income earners first, as they tend to spend a larger portion of their budget on food and energy, which can’t be easily substituted or eliminated when prices spike. Eventually, higher prices can work their way up the income chain and affect companies and whole industries.
A low and steady level of inflation is typically considered positive for an economy, because it signals growth and healthy demand for products and services. Businesses can grow to meet that demand by hiring more workers, which leads to increased wages and consumer spending. Investors can benefit from inflation, because the value of their savings increases and they may be able to buy more goods and services for the same money. Borrowers can also benefit from inflation because it reduces the real value of their debt, making it easier to repay loans.
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