Inflation is when prices rise over a long period of time, causing your purchasing power to decline. Consumers can feel this effect in their daily lives, from higher food and utility bills to rising mortgage payments. Businesses struggle with inflation too, often in ways that aren’t as immediately apparent. In fact, in a 2023 survey of small business owners, 26% named inflation as their biggest challenge.
A price index is a measure of the average price of a basket of goods and services that people consume regularly, weighted by the share of these items in overall spending. This allows comparisons between the price of the basket across different periods. In the US, the Bureau of Labor Statistics publishes the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE).
There are many reasons prices may rise. One common reason is when the supply of money increases dramatically, such as when a central bank prints too much currency to stimulate an economy. Another reason is when events disrupt production and raise the costs of raw materials, such as a natural disaster or war. This is known as cost-push inflation.
Inflation can also occur when demand for a product outstrips supply, and firms struggle to keep up with the increase in customer demands. This can lead to higher wages, which in turn leads to more consumer spending and more inflation. When demand decreases, companies can pause hiring or lay off staff, and their pricing can adjust downward which can help to slow inflation.
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