The inflation rate is the change in prices of goods and services over time. It affects everyone in the economy, but it particularly hurts consumers on fixed incomes, businesses and people who have borrowed money (such as homeowners or debt holders).
Fortunately, there are things you can do to keep inflation at bay, and most governments seek to do so at crucial times for their citizens. However, this is not easy, as prices of some items, such as traded commodities or wages established by contract, change very rapidly, while others, such as mortgage payments and property values, change much more slowly (or are “sticky”).
Inflation can be good or bad depending on the amount and the direction of the increase. A moderately high inflation is useful to stimulate the economy as it encourages consumers to buy sooner rather than later, whereas low inflation slows consumption and discourages borrowing. Galloping inflation, on the other hand, causes the value of money to decline quickly and erodes the purchasing power of everyone. This also makes it difficult for businesses to operate and leads to lower economic growth. It also discourages foreign investment and drives away business owners.
To measure inflation, statisticians create an index of a basket of goods and services that consumers purchase, such as the Consumer Price Index, or CPI. Then they compare the value of the basket from one month to the next and from year to year, calculating an annual inflation rate for that period. Statisticians often exclude the prices of government-set goods and services, as well as volatile products such as food and energy, whose prices are more likely to be affected by seasonal factors or temporary supply conditions. This is called core consumer inflation and is watched closely by policymakers.