When inflation kicks in, the value of your paycheck goes down, meaning a given amount of money can buy less of what it could previously. Keeping up with the rate of inflation and how it affects different segments of the economy is important to your financial well-being.
The Bureau of Labor Statistics tracks changes in prices across a variety of consumer categories to calculate the overall inflation rate. The most widely used figure is the consumer price index, which is based on data gathered by households about their spending habits and weights the prices of individual items to reflect how much consumers spend on them. Core consumer inflation, a more closely watched figure, strips out volatile spending categories like food and energy that are more affected by seasonal factors or temporary supply conditions.
Many different economic factors can lead to rising prices, but the most basic cause is an imbalance between demand and supply. This happens when people want something that is in short supply, such as oil during the Covid-19 pandemic or computer chips amid the war in Ukraine, causing them to be willing to pay more for those products. A relaxed monetary policy that circulates more currency than the economy can support can also push up prices.
Companies play a role in inflation, too, especially when they manufacture popular products that are in high demand. The higher demand can push them to increase prices even if they don’t have the ability to produce more of their product, which can make it difficult for other companies to keep prices down. The resulting spiral can increase the general price level, distorting relative prices, wages and rates of return along the way.
