The rate at which prices rise has big effects on consumers, businesses and the economy as a whole. It can reduce the purchasing power of money, which in turn affects wages, rates of return on investments and more. Government agencies track a broad array of prices, calculating their changes over time to come up with inflation rates.
The Consumer Price Index (CPI) is one of the most common measures, tracking a basket of items to give us a picture of how price changes are impacting people’s everyday spending. Statistical agencies compare the prices of these 8,000 items month to month, or quarter to quarter and year to year to determine the CPI’s growth over time.
A few things to keep in mind about inflation:
First, different people have a lot of variation in what they buy, so their personal inflation rates might end up being higher or lower than the national averages we hear about. For example, someone who drives might feel a greater impact from inflation than someone who takes public transportation, as their car insurance and repair costs are likely to go up. And the same goes for other categories, like medical care and education, where costs are often rising faster than the overall economy. Also, rich and poor people tend to see different impacts from inflation because they have a different balance of assets versus income. The super-wealthy may not be affected much by inflation because they own a lot of assets priced in their home currency, such as stocks and real estate. While the working class can feel it because they need income to pay for essentials.