The inflation rate is a key metric used to determine the impact of changes in price levels on an economy. It is calculated as the change in the consumer price index (CPI) or personal consumption expenditures (PCE) price index, which are published monthly by the US Department of Labor, over a year.
Inflation can be either good or bad, depending on how much and how fast prices rise and on the underlying economic fundamentals. If prices rise too quickly and for too long, it can lead to a loss of purchasing power for consumers that can depress spending and cause companies to stop hiring or even halt operations altogether. This can be called demand-pull inflation.
Keeping track of inflation is important for both consumers and investors. Those on fixed incomes, for example, can see their purchasing power erode over time with higher inflation rates. Those who receive benefits from the government like Social Security can receive annual cost-of-living adjustments that are tied to CPI inflation or PCE inflation.
The inflation rate is a measure of the overall average pace of price changes across all goods and services in an economy. However, some products have more volatility in their prices than others, which is why policymakers tend to focus on core inflation. This measures the overall trend in prices, excluding food and energy, which are more volatile, to provide a clearer picture of underlying inflation trends. The broader PCE price index, which takes into account more goods and services than the CPI, is also watched by policymakers.