Topic
Inflation
Inflation is a broad increase in the prices of goods and services over time, which reduces the purchasing power of a unit of currency when income does not rise equally.
At a glance
- Common U.S. measure
- Consumer Price Index (CPI)
- Effect
- Changes purchasing power
Overview
Inflation is measured using price indexes that track baskets of goods and services. In the United States, the Consumer Price Index is one widely used measure, while other indexes answer different economic questions. A single product becoming expensive is not by itself the same thing as broad inflation across an economy.
How a price index works
A statistical agency observes prices for many categories, weights them according to the design of the index, and compares the resulting level over time. The published inflation rate is therefore an aggregate measure and may not match the exact change experienced by a particular household.
Why personal experience can differ
Households buy different combinations of housing, food, transportation, medical care, education, and other goods. When a category that matters heavily to one household moves differently from the overall index, that household can feel more or less inflation than the headline number suggests.
Sources and review
MOOR's explanatory text is supported by the following source links.
- Consumer Price Index Frequently Asked Questions — U.S. Bureau of Labor Statistics
- What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation? — Federal Reserve