Inflation Rate

Published Jan 4, 2023

Definition of Inflation Rate

The inflation rate is the rate at which the general level of prices for goods and services is rising, and therefore, subsequently, purchasing power is falling. That means it is a measure of the average change in the prices of goods and services that households buy.

It is important to note, that inflation is not necessarily a bad thing from an economic perspective. In fact, most governments aim for inflation rates between 1% – 2% annually. Rates within these ranges are considered to be acceptable for a healthy economy. However, if the increase in price levels exceeds 3% per year, that’s usually a cause for concern.

Example

To illustrate this, let’s say that in January, a loaf of bread costs USD 2.00. In February, the same loaf of bread costs USD 2.10. That means over the course of one month, the price of bread has increased by 5% ([2.10-2]/2*100). Or in other words, the inflation rate for that month is 5%, and the purchasing power of your money has decreased, because you now get less bread for the same amount of USD.

Why Inflation Rate Matters

The inflation rate is an important economic indicator because it affects the purchasing power of money. It is closely monitored by governments, central banks, and other financial institutions. That is because inflation can have a significant impact on the economy.

If the inflation rate is too high, it can lead to a decrease in consumer spending, which can ultimately lead to a recession. On the other hand, if it is too low, it can lead to deflation, which can lead to an economic slowdown. Therefore, it is important to keep inflation in check in order to maintain a healthy economy.