Inflation occurs when prices rise for all goods and services in an economy. When prices go up, the purchasing power of money declines–meaning $100 today will buy fewer goods and services than it would have bought for $100 last year. This is what’s meant by saying “inflation hurts savers.”
A few things can cause inflation. For example, limited fuel supplies can lead to high gas prices if demand stays the same. Similarly, a relaxed monetary policy that circulates more currency than the economy can support can also cause inflation. But the most common cause of inflation is simply the economic principle of supply and demand. When demand outstrips production capacity, companies will raise prices to meet demand. This is known as demand-pull inflation.
The most common way to measure inflation is through the Consumer Price Index (CPI), which is calculated by examining a basket of items that consumers purchase on a regular basis. This includes food, clothing, housing and utilities. The CPI is typically measured on a monthly basis and compared to a base year. Since prices of foods and oil can change quickly, statistical agencies also report a figure called core inflation that excludes these volatile components.
In general, a low level of inflation is considered good for an economy. However, higher levels of inflation can make it harder for people to afford basic expenses and big-ticket items like homes. It can also hurt those who have saved, as the value of their savings will erode over time.
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