A country’s inflation rate is the annual change in the price level of a basket of consumer goods and services. A higher inflation rate indicates that prices are rising more rapidly than wages, and is generally viewed as a negative sign for economic health. The Federal Reserve’s goal is to keep the inflation rate below 2%, which is considered healthy for an economy. The opposite of inflation is deflation, which occurs when prices decline.
Human needs are expansive, and most people need a large set of products and services to live a good life. To measure the overall impact of these different products and services on a person’s purchasing power, statisticians use the Personal Consumption Expenditures (PCE) price index. This index, published monthly by the Bureau of Labor Statistics, measures a basket of items including food, utilities, gasoline, and more. The index is weighted to take into account different regions and sectors of the economy.
The PCE is a key statistic for economists, investors, and consumers. Rising inflation can cause people to lose purchasing power, and it can cause people with fixed incomes, like retirees on Social Security, to have trouble meeting their spending goals. It’s important for people to be aware of the inflation rate when creating their financial plans, because the interest they receive on savings accounts doesn’t often beat the inflation rate.
The causes of inflation can vary and can be complex. However, most economists believe that monetary policy is a significant factor in inflation over the long term. When central banks create more money than the public wants to hold, the increased supply of money eventually pushes up prices and wages.
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