The inflation rate is the percentage change in prices of a basket of goods and services used by households. It is a key economic indicator because it provides insights into the purchasing power of consumers and economic growth. The most common measure of inflation is the Consumer Price Index (CPI), which measures and tracks prices on a large number of products and services. Other measures are the Producer Price Index (PPI), which tracks prices at earlier stages in the production process, and the Wholesale Price Index (WPI).

There are several reasons why prices rise. The most obvious is that demand for a good or service outstrips supply, which drives up prices in line with the principle of supply and demand. This is called demand-pull inflation.

Another reason is rising production costs. This can be driven by factors like higher raw material prices, labor shortages and disruptions in the production of inputs such as energy or food. This is called cost-push inflation.

The inflation rate can also be influenced by the expectations of consumers, businesses and investors about the pace at which prices will increase. For example, if they expect prices to rise by 2 percent annually, they may build that assumption into their wage negotiations and contractual pricing adjustments in future years. As a result, the inflation rate may rise even though the actual prices aren’t changing by 2 percent each year. Unevenly rising prices can distort the purchasing power of individuals over time and reduce economic growth.