A rise in prices is often a sign that the economy is growing, but too much inflation can cause problems for both consumers and businesses. Inflation is measured by the percentage change in a basket of goods and services consumed by households, typically measured monthly and year-on-year. Statistical agencies also track “core” consumer inflation, which excludes highly volatile foods and energy that can quickly reflect short term supply and demand conditions. This figure helps policy makers and investors better detect long term inflation trends.
For consumers, the most glaring impact of high inflation is that it erodes purchasing power. This is because when prices go up, your money doesn’t buy as much, making it harder to maintain a certain standard of living. This is especially true for people with lower incomes who tend to spend a higher proportion of their budgets on essentials, such as food and gas.
Businesses must contend with rising costs as well, including higher raw materials and labor. They may need to pass these increases onto consumers, or cut back on production or other overhead expenses. Inflation can also make it more expensive to borrow, which can put pressure on debt payments for businesses and individuals. The good news is that a central bank can help moderate inflation by influencing the amount of money in the economy with its interest rate policies. If a government is unable to control the pace of inflation, it could jeopardize the country’s economic stability and its currency.