The pace of price increases, commonly called inflation, affects a wide range of things from people’s purchasing power to interest rates on the national debt. Understanding and properly managing inflation is a key element to promoting healthy, sustainable economic growth.
Inflation can be measured in a variety of ways, but the most common involves comparing the prices of “baskets” of goods and services that people typically buy over time. The price indexes are based on data collected from surveys of households or companies, and they are weighted to reflect the relative importance of each item in the typical consumer’s basket. Statistical agencies then track the index from one month to the next, and from year to year to determine how much items in the basket have cost more or less since the previous period.
Pent-up demand, supply chain disruptions, and rising commodity prices were among the factors that drove the COVID-19 pandemic’s recent burst of inflation. As those factors fade, tight labor markets and wage pressures will become the main drivers of future inflation.
Inflation isn’t new, though modern-day inflation has accelerated as the economy has grown faster than in the past and central banks have raised interest rates to keep inflation in check. But even with slower growth, inflation can cause problems, such as making it harder for businesses to sell products at a profit or for workers to afford the goods and services they need. And it can also make it difficult for governments to pay the interest on their national debt, or to cover the costs of public services.
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