Inflation

How inflation is measured

Economists and statistical agencies track inflation with indices that aggregate prices across a representative basket of goods and services. Common measures include the Consumer Price Index (CPI), which reflects out-of-pocket expenses by households, the Producer Price Index (PPI) focusing on earlier stages of production, and the GDP deflator, which covers the broad economy. These indices use weights to reflect typical spending patterns and are reported periodically to indicate month-to-month or year-over-year changes.

Typical causes

Inflation can arise from multiple sources, often interacting. Analysts usually distinguish several broad types:

• Demand-pull inflation: when aggregate demand in the economy grows faster than supply, bidding up prices.
• Cost-push inflation: when production costs rise (wages, raw materials, energy), firms raise prices to maintain margins.
• Built-in or wage-price inflation: expectations of future inflation lead workers to seek higher wages, which firms pass on as higher prices.

Consequences and importance

Moderate, predictable inflation is common in growing economies and is often regarded as manageable. But inflation has redistributive effects: it erodes real incomes for people on fixed nominal incomes and can benefit borrowers by reducing the inflation-adjusted value of debt. High or volatile inflation distorts economic decisions, complicates long-term contracts and investment planning, and can reduce the efficiency of price signals in markets. Very low inflation or deflation can also be harmful by encouraging delayed consumption and increasing real debt burdens.

Policy responses and notable distinctions

Monetary policy—principally central bank interest-rate adjustments and control of money supply—plays the central role in stabilising inflation. Fiscal policy and structural reforms can also influence price dynamics. Economies distinguish ordinary inflation from hyperinflation, an extreme, rapid loss of currency value, and from stagflation, a combination of high inflation with weak growth and high unemployment. Historical episodes such as postwar and 1970s inflationary periods illustrate how supply shocks, monetary expansion and expectations interact, but policy frameworks have evolved to emphasise transparency and anchoring expectations.

Summary

Inflation is a core macroeconomic variable affecting living standards, interest rates, wages and investment. Understanding its measurement, causes and consequences helps households, businesses and policymakers make informed decisions. For further detail on price statistics, see the official methodological guides and periodic releases from national statistical agencies and central banks: price statistics and analyses on inflation and deflation.