If your paycheck doesn’t go as far as it used to, it might be because inflation is eroding the purchasing power of your money. Learn more about what’s driving higher prices and how to understand the rate of inflation.
The Bureau of Labor Statistics reports the annual percentage change in the Consumer Price Index (CPI), which looks at the prices of a basket of 700 goods and services that represent what people typically buy. It also reports the annual percent change in a subset of that basket, known as core CPI, which excludes volatile spending categories such as food and energy.
Inflation occurs when consumers demand more of a good or service than the companies can produce. This gives companies the leverage to raise prices based on supply and demand, which economists call “demand-pull” inflation. A rising price tag means that a $100 bill you hold under your pillow now will only buy $97 worth of items next year.
The inflation rate is measured by a number of different ways, including by the Federal Reserve, which uses its own price index called the Personal Consumption Expenditures, or PCE Index, which takes into account a broader array of goods and services than the CPI does. The US government also produces a “core” version of the PCE index that focuses on more stable spending categories such as healthcare and housing.
The current high inflation rate is being driven by many factors, from global conflict to changes in what consumers purchase. But Michael Gapen, head of U.S. economics research at Bank of America, pins the rise in prices on three general causes: increased household demand, backlogs of work orders for goods and services caused by supply chain shortages related to the Covid-19 pandemic, and higher wage pressures that force firms to raise prices.