Inflation is a rising trend in the price of goods and services that consumers and businesses buy. The most common way to measure inflation is to look at the Consumer Price Index, or CPI, which compares the prices of a basket of goods and services that people typically buy with the prices of those same items one year earlier. The CPI includes all the things that consumers spend their money on, from food and housing to recreation and transportation. Because food and energy prices can fluctuate so much, many economists prefer to use a version of the CPI called core consumer inflation, which excludes those volatile categories.
Inflation rates vary from country to country, but the general goal is to keep prices stable and affordable for both consumers and producers. High levels of inflation, on the other hand, can distort vital relative-price signals that might otherwise guide production, consumption, and labor choices. These distortions can lead to costly misallocation of resources and ultimately to higher costs for the overall economy.
The high inflation rate that the United States experienced in 2021 and 2022 can be traced to a combination of factors, according to McKinsey analysis. The increase in the amount of money and credit entering the economy pushed up commodity prices, which in turn pushed up the cost of production inputs such as raw materials and energy. This type of inflation is called “cost-push.”
The other common cause of inflation is demand-pull. This happens when the growth in the number of people in a market for a particular product or service leads to an increase in production to meet that demand. Examples include the population boom in China after its 2008 economic reforms and the COVID-19 pandemic, which caused supply chain disruptions around the world that increased costs and delayed deliveries.