Inflation is when prices of things rise over time.
For example, in 1980 you could buy a movie ticket for less than $3, while these days a ticket costs about $9 on average. Although it can feel bad when things become more expensive, it’s pretty normal (healthy even) for an economy to experience a steady amount of low inflation.
Many different factors can contribute to inflation, including:
Inflation might seem like a wonky problem for economists and the government. However, it can impact your day-to-day life in both good and bad ways:
|The good||The bad|
|Encourages consumer spending (which is good for the economy)||Your money buys less than it did before|
|Wages go up||Interest rates go up, making borrowing more expensive|
|Some investments (like your house) usually go up in price along with inflation||Some investments (like CDs and cash) lose value|
That said, every instance of inflation doesn’t necessarily produce these results. For example, sometimes wages stay steady even when there’s strong inflation or investments that usually perform well tank instead.
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.“
It might sound great to be able to buy a movie ticket for $3 or a house for $100,000, like you could in the 1980s. And very high inflation can cause major problems throughout the economy.
But some inflation helps grease the wheels of the economy. Plus, a little inflation is better than risking deflation (when prices fall) because deflation can pull an economy into a full-blown depression.
Government policy influences inflation. Many governments aim for around a 2% annual inflation rate—that’s considered to be the sweet spot for slow but steady positive inflation.
The government tracks inflation with price indexes. Here’s how it works:
In the U.S., the main measure of inflation is called the Consumer Price Index, or CPI.
Inflation is the increase in the prices of goods and services over time. A growing economy, rising energy prices, and changes in government policy can all result in inflation. While it tends to have a mixed impact, inflation is generally better than deflation, which can cause a depression.