Inflation is an economic phenomenon when prices rise faster than wages. This decreases the purchasing power of money and can make a savings account worth less than it used to be. Governments try to manage inflation by adjusting interest rates, raising taxes and cutting spending. Inflation is a big concern for businesses because it makes it difficult to plan for the long-term. A rising rate of inflation can also devalue the value of a company’s assets, such as its stock price.
The Bureau of Labor Statistics (BLS) tracks and publishes a variety of price indices to help policymakers, business leaders and consumers track overall inflation trends. For example, the Consumer Price Index measures the average change in the prices of a basket of consumer goods and services (there are several different CPI measurements).
A high inflation rate typically indicates that the economy is overheating. Typical factors include higher-than-normal money supply growth, increased raw material costs, labor mismatches and disruptions caused by geopolitical conflict. These factors can lead to a “demand-pull” inflation that causes prices to climb even more rapidly than the economy can produce them. This type of inflation is particularly dangerous in service-based economies, like the US, where a rapid pace of wage increases can quickly fuel further price inflation.
The BLS also tracks and reports monthly core prices, which exclude energy and food. This helps to smooth out seasonal changes in certain items, such as back-to-school or tax season.