Nobody loves inflation, the economic force that makes your morning cup of coffee cost more tomorrow than it does today. But here\u2019s the thing: Despite the fact that it\u2019s making everything more expensive over time, a modest amount of inflation is completely necessary for economic growth, and knowing what the inflation rate is, whether it\u2019s high or low, can help guide your money decisions.<\/p>\n
Inflation<\/a><\/span> is the tendency for prices of goods and services to rise over time. Too much inflation suggests that an economy is facing serious troubles\u2014but negative inflation, otherwise known as deflation<\/a><\/span>, is an even bigger problem. Achieving inflation that\u2019s not too hot, not too cold, but just right is needed to drive spending among businesses and consumers, and thereby create a baseline of economic growth.<\/p>\n Typically expressed as a percentage that indicates a year-over-year rate of growth, the inflation rate gives you a quick and ready measure of the changing purchasing power of consumers and businesses. Measuring inflation is a matter of national importance, and maintaining a steady rate of inflation is one of the two main jobs of the Federal Reserve<\/a><\/span> (the other is promoting full employment).<\/p>\n Another way to think about inflation is in the context of the value of a country\u2019s currency, like the U.S. dollar. As prices rise, each dollar you hold buys fewer goods and services. As the purchasing power of each dollar declines, the general cost of living<\/a><\/span> goes up. Why? Because now the public spends the same amount of money but gets fewer things for it.<\/p>\n While high inflation can hamstring the economy by depressing purchasing power, too-low inflation is also undesirable as it puts a damper on growth by keeping too much money out of the economy in savings accounts<\/a><\/span>, as people stop spending and wait for the value of their dollars to increase. The optimal inflation level encourages spending today instead of saving, which feeds economic growth at just the right level.<\/p>\n The two most frequently cited indexes that calculate the inflation rate in the U.S. are the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). These two measures take different approaches to measuring and calculating inflation.<\/p>\n The Bureau of Labor Statistics (BLS) calculates CPI inflation by gathering spending data from tens of thousands of regular consumers around the U.S. It tracks a basket of commonly purchased goods and services, including things like food, gasoline, computers, prescription drugs, college tuition and mortgage payments, to gauge how prices generally change over time.<\/p>\n Two components of this basket\u2014food and energy\u2014can see very significant changes in price from one month to the next, depending on seasonal demand and potential supply disruptions at home and abroad. For this reason, the BLS also publishes Core CPI, a measure of so-called \u201cunderlying inflation,\u201d which intentionally leaves out volatile<\/a><\/span> food and energy prices.<\/p>\nHow To Calculate Inflation Rates<\/h2>\n
What Is CPI Inflation?<\/h3>\n