The rate at which prices increase can affect many facets of the economy, from influencing people’s purchasing power to lowering or raising interest rates on debt. Understanding and properly managing inflation is a key element of a healthy, growing economy.
Inflation is measured through price indices created by government agencies such as the Bureau of Labor Statistics (BLS) and the US Department of Commerce’s Bureau of Economic Analysis, among others. The Consumer Price Index, or CPI, is one such index that reports the average change in the prices paid by urban consumers on a selection of items over time. It is often used to determine eligibility for government assistance, provide cost-of-living adjustments to workers and to adjust benefits for programs such as Social Security.
More granular price data is available through the Personal Consumption Expenditures or PCE index, which takes into account more categories of spending and also uses business surveys to determine a broader range of prices. Another measure of inflation, the Gross Domestic Product (or GDP) price index, incorporates prices for all goods and services produced in the country as well as the cost of imported goods and services into a year-over-year calculation of real, or inflation-adjusted, GDP.
Inflation can cause people’s paychecks to stretch less and less, and it can also devalue assets like a savings account balance or the value of a home. To help better understand what’s behind inflation, Select spoke to Michael Gapen, head of U.S. economics research at Bank of America, who pointed to several causes for recent high levels of inflation.
