Inflation affects many facets of the economy, from individual spending power to interest on the national debt. Pent-up demand, supply-chain issues, government spending, and the war in Ukraine pushed the annual rate of inflation to around 8 percent in 2022, the highest rate in 40 years. However, recent actions by the Federal Reserve have helped tame the nation's rising prices. Read on for an overview of inflation, how it is measured, why it matters, and how it can be addressed. Consumer Price Index (CPI) from the BLS tracks the average change over time in prices paid by urban consumers. It is commonly used to adjust income eligibility for government assistance, provide cost-of-living adjustments to workers, and adjust benefits for programs such as Social Security. Personal Consumption Expenditures (PCE) Price Index from the BEA is the primary index used by the Federal Reserve to monitor inflation. Similar to the CPI, it also tracks prices paid by urban consumers, but the two indices differ in a number of ways; for example, the CPI only tracks out-of-pocket healthcare expenses paid by the consumer whereas the PCE also includes healthcare expenses paid through health insurance on behalf of the consumer. Producer Price Index (PPI) from the BLS measures the average change over time in the selling prices of goods produced in the United States. This index differs from the previous two in that the PPI looks at the prices paid by producers  such as prices for intermediate goods  whereas the CPI and PCE only look at the prices paid by the consumer for final products. Gross Domestic Product (GDP) Price Index also measures the change in prices paid for goods and services produced in the United States. The GDP price index differs from the PPI in that it includes the prices of goods exported to other countries but excludes imports (vice versa for PPI). The GDP price index is used to adjust economic activity, allowing for a year-to-year comparison of real (inflation-adjusted) GDP. Some measures of inflation are calculated more narrowly as the change in prices for a specific set of goods and services or even a specific geographic area. Likewise, the change in prices is often reported on an annualized basis but is generally collected monthly. 

The rate at which prices change can have ramifications across the economy, affecting businesses and consumers alike. For instance, when high levels of inflation occur, the value of one's money (also known as purchasing power) erodes, as consumers are no longer able to buy as much product with the same amount of money. Likewise, if wages do not rise at a similar rate as prices, inflation can devalue people's wages and savings and increase the cost of living.

Changing prices can also create disparities across the economy by distorting the purchasing power for some individuals over time. An example of this is inflation's effect on fixed interest payments. For instance, an individual with a fixed 3 percent yearly increase to their pension would lose purchasing power if inflation were higher than 3 percent, as the value of their pension would decline. On the other hand, someone with a fixed-rate mortgage of 3 percent would benefit from higher inflation as making those payments would become easier (assuming wages also rose with inflation).

Finally, inflation and deflation make it harder to anticipate how other aspects of the economy may change such as interest rates, wages, taxes, and profits. That uncertainty could lead to less activity in the economy, such as businesses adjusting hiring decisions or households reducing their spending, and ultimately stunt economic growth.

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Inflation the general increase in prices of goods and services over time is a significant economic indicator with widespread implications It impacts v... View the full answer