Definition
Inflation reduces the purchasing power of money over time. The Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) are the primary measures. The Federal Reserve targets 2% annual inflation as optimal for economic growth. Core inflation excludes volatile food and energy prices for a clearer trend signal. Persistent high inflation triggers monetary tightening (rate hikes).
functions Formula
Inflation Rate = (CPI_current − CPI_prior) / CPI_prior × 100%
lightbulb Example
CPI increases from 305 to 315 year-over-year. Inflation rate = (315-305)/305 = 3.3%. At this rate, $100 today buys only $96.70 worth of goods next year.
verified_user Key Points
- CPI and PCE are primary measures
- Fed targets 2% annual inflation
- Core inflation excludes food and energy
- High inflation triggers Fed rate hikes