The rate of inflation measures how fast prices are rising, and is typically measured as a percentage. Inflation is a symptom of economic growth and can be a good thing for consumers as it means goods and services are becoming cheaper. However, a too-fast rise in inflation can be bad for people as it erodes purchasing power and makes saving money more difficult. This is why the Federal Reserve tries to keep inflation rates around 2 percent on average.
Inflation is measured by using a price index, which compares the current prices of a basket of goods and services to previous ones. The most popular price index is the Consumer Price Index (CPI), which calculates price changes by dividing the total value of a basket from a base date, such as January 1975, by the number of years passed since that date. A higher CPI indicates a higher rate of inflation. Many government agencies also monitor a more narrowly defined measure of inflation known as core CPI, which excludes the volatile prices of food and energy that are often influenced by temporary supply conditions.
The main causes of inflation are when demand for products outstrips their supply, or when production costs increase. The latter is sometimes referred to as cost-push inflation, and is often the result of increased speculation on commodity markets or other economic factors that can create shortages of raw materials. Rising prices work their way through the entire chain of production, and eventually end up in a higher sales price for finished goods and services.