The rate at which prices change can have a big impact on many aspects of the economy. It impacts people’s purchasing power, economic growth, and can raise or lower interest rates on the national debt. Inflation often results from an imbalance between supply and demand — when demand outpaces supply, higher prices tend to follow. Usually, economists divide causes of high inflation into two categories: demand-pull inflation and cost-push inflation.
The government tracks inflation by comparing the prices of hundreds of items, including everything from milk to gas to the price of housing. These prices are collected every month, and the difference between those monthly prices is the inflation rate. There are a number of different indexes that track inflation, but the most commonly used is called the Consumer Price Index (CPI). The CPI is designed to measure the prices that 90% of Americans actually buy, and the list of goods and services that comprise the basket is constantly changing.
Inflation can be a good thing, but it can also be dangerous. When prices rise too fast, the value of money erodes and it becomes harder for people to keep up with the cost of living. When this happens, it can lead to unemployment and other social problems.
Various government datasets track prices and inflation, but there are a few key ones that are watched closely by policymakers. For example, the Producer Price Index (PPI) measures wholesale inflation, while the Core Consumer Index focuses on the underlying pace of price changes by excluding food and energy, which are more volatile.