The inflation rate describes the percentage of prices that are rising, reducing the purchasing power of money. It’s important to understand the rate of inflation, since it can affect people’s day-to-day expenses and economic growth. It also influences the Federal Reserve’s monetary policy decisions.
Various government datasets measure prices, but the Consumer Price Index (CPI) is perhaps the most widely-used. This is because CPI tracks the prices of a basket of consumer goods, including food and energy, and changes in these prices approximate the overall prices in the economy. CPI is measured monthly and compared to the same period last year to determine its inflation rate.
Inflation is the result of an imbalance between the demand for money and the amount that is created. When the demand for money outpaces its supply, it pushes up all prices and wages, as per the economic principle of supply and demand. This is known as demand-pull inflation.
The Federal Reserve has a goal of keeping inflation under control, and it does so by tightening and loosening its monetary policies. However, the recent relative price shocks that have pushed inflation higher than expected might continue to cause the genie to escape from its bottle. Michael Gapen, head of U.S. economics research at Bank of America, suggests that a combination of factors have contributed to the current high rates of inflation, including higher household demand, supply chain disruptions due to the COVID-19 pandemic and the war in Ukraine, and tight labor markets.
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