Inflation is an increase in the general level of prices that decreases the purchasing power of money.
It tends to occur when there is too much money chasing too few goods, which can happen as a result of monetary policy decisions by central banks to print too much money. When the supply of money grows, it loses some of its value. Meanwhile, “too few goods” is usually caused by supply constraints like insufficient raw material inputs, labour shortages or shipping backlogs. These imbalances on either side of the demand-supply equation are the root causes of inflation.
The consumer price index (CPI) is the most common measure of inflation. The terms CPI and inflation are pretty much interchangeable. CPI tells us the weighted average price of a basket of household goods and services purchased by consumers. The various goods and services include primarily; food, shelter, transportation, and household expenses. This basket of goods and services is intended to represent the experience of a typical consumer.
Headline inflation is separate from core inflation, which excludes the volatile food and energy components. Both are important metrics, but official targets are usually for headline inflation.
Inflation is an important indicator of economic health. Governments and central banks use inflation data to inform economic policy decisions, in particular based on whether actual headline inflation is in line with official targets.
Consumers hate inflation, because nobody likes paying more for the same thing and seeing their savings become worth less. Debtors on the other hand are perfectly content with inflation decreasing the real value of their outstanding debt.
