A measure of the average change over time in the prices paid by urban consumers for a set of consumer goods and services. This measure is used by government agencies to adjust income eligibility for benefits, make cost-of-living adjustments for workers and track the general price level of the economy.
Inflation occurs when the supply of money fails to keep pace with the demand for goods and services. The resulting price increases can devalue the purchasing power of consumers and lead to household belt-tightening or growing pessimism about the future, which in turn can slow economic growth. Monetary policy is one key way to manage inflation. High rates of inflation also raise the interest cost on debt, which can make it more expensive for businesses to finance operations and borrow capital.
A key measure of inflation is the Consumer Price Index (CPI), published monthly by the Bureau of Labor Statistics. It includes the average prices of a basket of consumer goods and services, such as coffee, shoes and hospital services. The CPI is typically the number you see quoted in news reports about inflation. The BLS also publishes other measures of inflation, such as the Personal Consumption Expenditures (PCE) price index, which takes into account a wider range of consumer spending and is weighted by data acquired through business surveys.
Core consumer inflation focuses on the more persistent trends in prices by subtracting out the prices of those goods and services set by the government or influenced by seasonal factors or temporary supply conditions. Core consumer inflation is often viewed as the best indicator of overall inflation and is watched closely by policymakers.
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