The rate at which prices for a basket of goods and services rises, expressed as a percentage. The rate of inflation is a key indicator for the economic health of a country and its currency. A high inflation rate can lead to higher interest rates, which decreases the purchasing power of money and slows economic growth.
Inflation isn’t always a bad thing; it can stimulate spending and investment when an economy needs a boost, and encourage businesses to raise wages to keep up with rising production costs. But persistently high inflation can jeopardize economic stability, and is often a sign of a weakening economy.
USAFacts explains inflation rate
A nation’s inflation rate is calculated by subtracting the current price of a selected “basket” of goods and services from the same basket of items in a previous period—then multiplying by 100 to get a percent figure. The basket is selected by statistical offices and other similar institutions based on extensive consumer surveys. The rate is then compared from month to month and year to year to determine the annual inflation rate.
The exact causes of inflation can vary, but are typically a combination of factors that work together. Monetary policies, for example, can cause inflation if they increase the money supply more quickly than economic output. Higher raw material and labor costs can also increase inflation, as can natural disasters and geopolitical conflict that restrict production capacity. And consumers and companies can become anticipatory of future inflation, leading them to demand higher wages and prices—which increases inflation expectations and has a self-reinforcing effect.
About the Author
