Inflation rate measures the change in the prices of a basket of goods and services used by households over time. Statistical agencies calculate the price index for this basket and then compare its value from one period to the next (monthly) or year to year (annual). By excluding highly volatile categories such as food and oil, which are subject to sudden supply and demand changes, core inflation provides a better picture of long-term trends.
As the prices of a basket rise, the purchasing power of money decreases. This decline in purchasing power affects all of the items that are priced with money, including wages and interest rates. This is why it is important to know the rate of inflation.
Inflation can be good or bad depending on how rapidly and widespread it is. People with real assets such as property or stocked commodities may welcome higher prices because they increase the real world value of their holdings. Individuals with debt, however, may not like it because rising interest rates can push their payments upward.
Inflation can also be caused by a rapid increase in supply of goods and services as businesses attempt to meet consumer demand at lower production costs. This is known as cost-push inflation. In this case, the rising prices of inputs such as energy and raw materials drive up final product prices. The increase in prices can lead to higher profits for industrial companies. However, it can also hurt consumers by forcing them to spend more on their final purchases.
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