A country’s inflation rate measures how much the price of a basket of goods and services is rising or falling over time. Inflation is a key economic indicator, and central banks monitor it closely because it influences their monetary policy. High levels of inflation reduce the purchasing power of money, making it more expensive to buy goods and services. This can also discourage investment, as people tend to save their money rather than invest it in businesses or other projects that could boost the economy.

Inflation is typically measured by comparing the current price of a basket of goods and services against the price of the same basket in an earlier period, such as one month or year. Statistical agencies then calculate the change in the basket’s prices over time to determine the inflation rate. A basket of goods is typically weighted according to the relative importance that each good or service has in household consumption. For example, a basket that includes books and childcare has more weight than a basket that only contains electronics. A country’s inflation rate is typically calculated using a consumer price index (CPI), such as the CPI from the Bureau of Labor Statistics, or a producer price index, such as the PPI from the Bureau of Economic Analysis.

Many economists believe that a moderate amount of inflation is good for economies, as it helps to keep the value of money stable. However, if inflation gets out of control, it can be detrimental to consumers and businesses because it makes their investments less valuable and can make it harder for them to meet their payrolls or purchase goods and services.