Inflation is a significant economic concern that can weaken the purchasing power of people’s money. It can also erode the value of savings and investments. Inflation is especially problematic for those on fixed incomes, such as seniors and retirees, who may not be able to keep up with rising prices without an increase in their income.
To measure inflation, statisticians use a basket of goods and services that are typical of household consumption in a country’s economy. This basket is compiled through extensive surveys conducted by statistical offices or similar institutions, and it covers everything from food and shelter to utilities like electricity and transportation. The prices of these items are tracked over time, and the changes in the prices of this basket are compared to previous periods to find a monthly rate of inflation. This information is then used to calculate a year-over-year rate of inflation.
When the price of a good or service goes up, there are two major reasons for this: demand-pull inflation and cost-push inflation. Demand-pull inflation happens when companies see a high demand for their products, so they raise their prices to take advantage of this market force. However, as a result of the increased demand, fewer products are available and other companies may start to raise their prices as well.
Cost-push inflation, on the other hand, is when production costs rise. These higher production costs can include raw materials, labor, or energy, and they are passed along to consumers as increased prices for the finished product.