A common metric for the economy is the inflation rate, which describes the overall increase in prices within a country over time. This figure is calculated by examining the price changes of a basket of products and services that people typically consume—called the consumer price index (CPI). Statistical agencies compare the current CPI to its previous version, which gives the monthly rate; doing this over a year then yields the annual rate.
Inflation is a complex phenomenon that can have positive or negative effects. For example, when inflation is high, purchasing power decreases and goods become less affordable for consumers—a situation known as deflation. On the other hand, companies can benefit from inflation as they can raise their prices to match those of competitors, and individuals holding tangible assets—such as property or stocked commodities—can see higher returns on their investments due to the rise in prices.
Ultimately, the rate of inflation depends on the overall economic environment. The main drivers of inflation are monetary policy, high raw materials costs, labor mismatches, supply chain disruptions, and geopolitical conflict. For example, the sharp rise in US inflation from 2021 to mid-2022 was caused by increased demand and shortages due to the COVID-19 pandemic, combined with commodity price shocks and higher input costs.
The other major driver of inflation is a change in aggregate demand, which can be stimulated by monetary policy or by rising wages. This type of inflation is often called “demand-pull,” and it can lead to a rise in the prices of both products and services. As demand for products increases, firms may need to hire more workers, which in turn drives up the wages of those employees.
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