A rising inflation rate can erode the purchasing power of a currency, meaning one monetary unit can buy fewer goods and services than it could previously. This can have an adverse impact on consumers, who may struggle to keep up with high prices for necessities such as food and gas, or even to meet their mortgage payments, or it can lead businesses to pass higher costs onto customers.
Inflation is measured by comparing a “basket” of goods and services with the same basket at different times, then calculating how much the value has increased or decreased. In the United States, the Bureau of Labor Statistics compiles a monthly Consumer Price Index (CPI) that takes into account a broad range of products and services used by urban consumers, including housing, transportation, utilities, clothing, food, and energy. The CPI is weighted according to the percentage of each good or service in a household’s budget, so that eggs for breakfast might have more influence on the overall calculation than a new car.
There are also other measures of inflation, such as the Core Personal Consumption Expenditures index, that takes out the effects of volatile items like food and gas. Regardless of how the inflation figure is calculated, it’s an important piece of information to track.
If you’re interested in learning more about how inflation can affect your finances, talk to a financial advisor. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. Interview your advisor matches at no cost to decide if they’re a good fit for you.