A nation’s inflation rate is a measure of the overall price level. The most common measure is the Consumer Price Index (CPI), which tracks what the government considers to be a representative basket of goods and services and records changes in those prices from month to month and year to year.
A high and unpredictable inflation rate can chip away at a currency’s purchasing power. The value of assets such as stocks, bonds and real estate can also decline in value if they don’t keep up with the inflation rate. People who own these kinds of assets often seek to buy more of them to maintain their buying power, which can drive up prices even further.
When there’s too much money in the economy, for example if central banks print too many dollars, it can cause prices to rise. Likewise, natural disasters or other events can raise the cost of inputs such as oil, which then drives up prices for the final products made from those resources. This is called demand-pull inflation.
But inflation can also be good for consumers. The middle class, for instance, often has a lot of debt, and when prices rise it makes those bills less burdensome. Inflation can also boost workers’ wages, making them feel like they have more purchasing power. It’s important to remember, however, that not everyone gets the same benefit of inflation. The super-wealthy, for instance, tend to have a greater ratio of assets to income than the average person, and so they don’t get as much enjoyment from higher prices.