A country’s inflation rate is the measured average of price changes for a basket of goods and services. Government agencies like the Bureau of Labor Statistics (BLS) produce a number of price indexes to help policymakers, business leaders, and consumers track overall price movements. The most widely used is the Consumer Price Index, or CPI, which tracks prices paid by urban consumers. This index, along with others produced by the BLS and the BEA, is used to adjust income eligibility for programs such as Social Security and to calculate cost-of-living adjustments for workers.
Each of these indexes takes into account different aspects of a basket of goods and services to generate an overall measure of inflation. For example, the BLS weights the prices of various categories such as shelter, bread, and books according to how much a typical household spends on each of these items. The overall CPI measures the average increase in these prices over time and compares it to a base year. This process allows the various indexes to be directly compared and is key in understanding how different measures of inflation may differ.
Inflation inevitably affects the purchasing power of money as it circulates through the economy. It increases the prices of some goods and services while lowering the costs of other goods and services. It also distorts wages, savings, and rates of return. This is why different groups of economic stakeholders care about the rate of inflation.