Inflation rate measures how fast prices for a basket of goods and services are rising on average over time. It’s important to understand because inflation affects how much it takes to buy the things you need in life. The Consumer Price Index (CPI) tracks changes in the prices of a large and diversified set of products that are commonly used, including commodities like food grains and metal, utilities like electricity and transportation, as well as services like healthcare, entertainment, and labor.
High rates of inflation can make it harder for businesses to maintain profit margins and to hire workers. It can also erode the purchasing power of consumers, especially those on fixed incomes such as pensioners.
Prices rise for a variety of reasons, from higher production costs related to raw materials and labor to market disruptions, rising demand, or fiscal and monetary policies. But prices also tend to change unevenly. Some items, such as food and energy, change quickly, while others, like wages that are established by contracts, take longer to adjust to inflation.
Annual inflation rates are calculated by subtracting the CPI for a given month from the CPI for that same month a year earlier, then multiplying by 100 to express the result as a percentage. Inflation is constantly changing, so investors and consumers must keep up with the latest data to determine how their spending and saving choices may be affected. However, a volatile and unpredictable economy can confuse these vital relative-price signals.