The rate at which prices rise can influence many facets of the economy, ranging from people’s purchasing power to economic growth and interest costs on national debt. Understanding and properly managing inflation is one of the keys to promoting a healthy, sustainable economy.
The most commonly used metric for tracking price changes is the Consumer Price Index (CPI), which measures the average change in prices for a diversified set of economic goods and services, such as food, housing, clothing, medical care, recreation, transportation and utilities. Other metrics focus on specific categories of goods or services, such as energy, to provide a more focused and detailed look at inflation.
Generally, inflation occurs when demand outstrips supply and this can push up prices for the products in question. For example, a surge in pork demand could result in high prices for bacon and ham. This kind of inflation is referred to as demand-pull inflation. The opposite of demand-pull inflation is cost-push inflation, which can occur when there is a shortage of the inputs that are needed to make the final product or service, for instance, higher oil prices driving up the cost of manufacturing and shipping all kinds of goods.
There are different kinds of inflation: Creeping inflation, when prices slowly rise, usually less than 3% a year. Walking (trotting) inflation, when prices increase moderately but the annual inflation rate stays in the single digits. Running (galloping) inflation, when prices rise significantly, often above 10% a year.