The inflation rate describes how quickly prices are rising. It is a key measure of the purchasing power of money and can affect how much it takes to purchase goods or services, how well companies can compete with their competitors, and how investors can plan for long-term financial goals.
There are several ways to measure inflation, with the Consumer Price Index (CPI) being the most popular. The CPI is calculated by tracking the prices of a basket of consumer items such as food, cars, clothing, recreation and housing. The items in the CPI are weighted to reflect their relative importance to consumers and to the economy.
Inflation can occur when demand for a product outpaces supply, or when the cost of raw materials that go into products increase. This is known as “demand-pull” inflation. Inflation can also occur when companies are unable to keep up with the demand for their products, so they raise prices in order to maintain revenue and remain profitable. This is called “cost-push” inflation.
When calculating your savings or retirement plans, you may want to bake in an inflation rate so that you can reach your financial goals and avoid losing purchasing power over time. In addition, when planning for your future expenses, it’s important to factor in the rate of inflation so that you can determine if the interest rates that you might be earning from savings accounts will be enough to cover your expenses over time.