The inflation rate is the percentage change in prices of goods and services bought by consumers. The Bureau of Labor Statistics (BLS) monitors the Consumer Price Index (CPI), which includes a basket of items such as food, shelter, clothing, medical care, recreation, transportation, education and communication. Inflation is a common concern among the public and policymakers, as high or uncontrollable rates of inflation can cause financial instability.
However, some economists argue that a small amount of inflation is necessary for economic growth. They claim that a moderately rising inflation rate can help reduce unemployment and increase incomes for working families, while also helping businesses maintain purchasing power.
When a country experiences high levels of inflation, it can make its exports uncompetitive, leading to lower domestic demand, a current account deficit and reduced economic growth. In addition, high inflation can decrease the value of savings, which can hurt retirees if interest rates are low.
The Federal Reserve, the central bank of the United States, targets an inflation rate of about 2 percent. This is because its mandate from Congress is to promote maximum employment and price stability. The Fed believes that a stable inflation rate will allow households and businesses to make sound decisions about saving, borrowing and investing, which is critical for a healthy economy.
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