The inflation rate is a measure of price increases in the economy over time. It’s calculated by comparing the price of a basket of goods and services to the same ones at a previous point in time—for example, January 2017 to January 2016. The Bureau of Labor Statistics calculates the Consumer Price Index (CPI) for the United States. The CPI is a measurement of the cost of the average American’s monthly expenditures on a wide range of products and services, including food, housing, apparel, medical care, recreation, transportation, education, and communication.
The CPI is important because it allows us to measure changes in prices across the economy. For example, a dramatic increase in the price of oil would be more noticeable when measured using the CPI than when it’s measured by the wholesale price index (WPI).
Inflation impacts everyone—whether you’re a truck driver or a stay-at-home mom. When it comes to making financial plans and saving for the future, it’s important to bake in an expected inflation rate. For example, if you’re planning to retire with a 3 percent annual increase in your pension, an inflation rate higher than that could cause you to lose purchasing power over time.
Understanding how inflation affects our buying power can help us make better decisions about when, where, and how to invest our money. For instance, investing in securities that earn interest above the inflation rate can help offset the impact of rising prices and provide a real return on our investments.