Generally, inflation is seen as a bad thing. As the prices of goods and services rise, the purchasing power of a currency falls, which reduces people’s ability to buy what they need and want. However, not all prices rise at the same pace. Some, like the prices of traded commodities, change rapidly; others, such as wages, are more “sticky” and therefore slower to rise and fall. Ultimately, whether or not inflation is a bad thing depends on how quickly and how unevenly prices change, and the amount of real income that consumers lose as a result.
To make sense of inflation, economists measure changes in the price level of a set of products and services that individuals need to live a normal life. This set includes items such as food grains, metals, fuel, utilities like electricity and transportation, and services such as healthcare and entertainment. The most commonly referenced measure of inflation in the US is the Consumer Price Index, or CPI, which tracks the average change in prices paid for a basket of consumer goods and services over time. Another measure used by policymakers and financial market participants is core inflation, which excludes the prices of foods and energy, which can be volatile and often reflect short-term supply conditions.
High or unpredictable rates of inflation can be a challenge for businesses, as they are forced to spend more time and resources on budgeting for inflation. It can also discourage saving and investment, as it makes it harder for individuals to know how much their savings will buy in the future.