A country’s inflation rate is the average rise in prices of a selection of goods and services over time. It is a key economic indicator and impacts purchasing power of a nation’s currency. A low and stable inflation rate is considered a sign of a healthy economy, while high or volatile rates are usually considered problematic and can lead to a loss of purchasing power.
When prices increase, everyone is affected, from consumers to companies to central banks. Consumers experience losses in their purchasing power, and may have to tighten their household budgets or buy less expensive goods. Companies face higher production costs and may have to pass the additional expenses on to their customers. Inflation can also affect investors, erode the value of savings or investments over time. Inflation is one reason why the federal government offers Treasury Inflation-Protected Securities (TIPS), which provide investors with a return that keeps up with inflation.
There are two main types of inflation: demand-pull and cost-push. Demand-pull inflation happens when there is a high level of demand for goods and services that outstrips supply. This can occur because of increased spending by a government or central bank, lower interest rates, more competition in the marketplace, and other factors.
Inflation can also happen because of higher production costs, such as raw materials or labor. When this occurs, the prices of finished goods will rise to reflect the higher production costs. This is called cost-push inflation.
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