A little inflation can help people feel like their money is getting a bit more valuable, encouraging them to buy sooner and avoid holding out for a lower price. But too much inflation can have a negative effect, reducing the purchasing power of dollars and making it harder to save for emergencies or invest in retirement. The optimum rate of inflation is around 2 percent.
A country’s inflation rate is the percentage change in its consumer price index (CPI). The CPI measures the average increase in prices of goods and services that consumers have bought during the past year. It excludes prices that are set by the government or by suppliers, as well as seasonal fluctuations in products like tax return preparation services or winter energy costs. It is often used to gauge a country’s inflation, though more accurate calculations use the Personal Consumption Expenditures price index published by the Bureau of Labor Statistics (BLS). The BLS’s index takes into account a broader range of consumer spending and uses a more comprehensive data collection.
Almost everyone is impacted by inflation to some extent, and the effects vary. The most visible impact is the loss of purchasing power, as each monetary unit can buy fewer items on average. This can be felt in the sting of rising grocery bills and the gut-punch of filling up your gas tank. It’s also a reason why low-income families often struggle more with high inflation than wealthier ones, who may have access to more savings. Meanwhile, businesses may find they are less competitive with higher prices abroad, as their products can sell for a certain amount in other countries but be priced at a different amount in their own.