A rising inflation rate can reduce the purchasing power of money, meaning that each dollar can buy fewer goods or services than it could previously. For individuals, this can be painful as they struggle to keep up with soaring grocery, gas and utility costs. And for businesses, high inflation can mean higher operating expenses and soaring raw material prices.
The rate of inflation is typically measured by comparing the current price level of a basket of consumer goods and services to its previous price level. This is known as an inflation index, and the comparisons can be made either monthly or annual. The most widely used consumer inflation index is the Consumer Price Index, or CPI. Another important index is the Producer Price Index, or WPI, which measures changes in prices at the wholesale level.
Inflation can be caused by a number of different factors. For example, a shortage of labor may lead to higher wages and salaries, which in turn leads to increased demand for products and services. As firms increase production to meet this demand, they may need to raise their prices. This cycle can continue, and over time the inflation rate will accelerate.
Individuals, companies and investors can protect themselves against inflation by reducing their debt, investing in assets that are likely to increase in value over time, or looking for opportunities to earn interest rates that outpace inflation. In addition, saving enough for future expenses can help to offset the impact of rising prices by allowing your savings to purchase more today than it would have in the past.