Inflation is a sustained increase in prices that reduces the purchasing power of your money, meaning you can buy fewer goods or services with the same amount of money. It can occur when demand exceeds supply, such as a bird flu outbreak that caused egg shortages in 2024. It can also be the result of a rise in labor costs, when businesses pass those higher wages to consumers in the form of increased prices. The Federal Reserve can also affect inflation through its monetary policy decisions.
There are many metrics used to measure inflation, but the most widely recognized is the Consumer Price Index (CPI). CPI tracks price changes for a wide range of economic goods and services consumed by people in the United States and is adjusted for changing demographics over time. The Bureau of Labor Statistics calculates monthly CPI data and releases it to the public. Another popular metric is the Producer Price Index (PPI) which reports price changes for domestic producers but excludes expenditures by foreign visitors. The Personal Consumption Expenditures (PCE) price index is a more comprehensive measure of prices in the economy and includes items not tracked by either the CPI or PPI.
Inflation is a challenge for anyone trying to reach their financial goals because it erodes the value of your savings and investments. It can also cause higher costs when it comes to paying for things like food, gas and utilities. However, by staying vigilant and proactively managing your budget, you may be able to keep pace with inflation or even beat it.