The inflation rate describes how quickly prices for a basket of goods and services rise. A basket represents human needs and includes a wide range of products including commodities like food grains and metals, energy sources such as electricity and fuel, utilities such as water and transportation, and services such as healthcare, entertainment, and labor. Government datasets track price changes for many of these items. The Consumer Price Index (CPI) is a well-known statistic that tracks the impact of price changes for the majority of these needs and offers a clear picture of the impact on everyday living expenses.
Inflation is often caused by excess spending by governments or businesses, which leads to a rapid increase in aggregate demand and limited supply capacity. This can lead to price spikes for a short period of time until the economic activity returns to normal and prices start to drop again.
High levels of inflation can have negative consequences for households, which include a loss of purchasing power as their hard-earned dollars don’t go as far. Inflation can also lead to higher interest rates, which can make borrowing more expensive for borrowers, especially those on fixed incomes such as pensioners and homeowners.
A global surge in inflation that lasted through 2022 was driven by several factors, most notably the COVID-19 pandemic, supply chain disruptions, and strong household demand (the ratio of job vacancies to unemployed workers doubled between mid-2021 and early 2022). As these factors fade, core consumer prices are continuing to rise, but at a lower, more manageable rate.