A country’s inflation rate reflects how much prices of goods and services are rising over a specified period. The measure is typically based on the Consumer Price Index (CPI) or similar indices that measure items at the wholesale and producer level, such as the Producer Price Index (PPI). Governments closely watch inflation rates because they can affect how consumers spend their money, how businesses invest in new equipment, and how businesses manage their long-term expenses.
A low, stable, and predictable rate of inflation is generally considered positive for an economy because it means that the purchasing power of a country’s currency is increasing slowly. High or unpredictable inflation, however, can hurt a nation’s economy by adding inefficiency to the market, discouraging business investment, and making it difficult for consumers to budget and plan for future spending. Inflation can also erode the value of savings and reduce the return on investments, especially when interest rates are low.
Many people worry about rising food and gas prices and a potential increase in inflation. But Assistant Professor of Economics Sandeep Mazumder says that consumers may actually be better off if inflation is slow and steady, not rapid.