The inflation rate is the percentage increase in prices over a specific period. To calculate inflation, you need a start and an end date and data from the Consumer Price Index (CPI) which measures average changes in prices nationwide. The formula is a simple one: take the CPI’s starting cost for a good or service and subtract it from the CPI’s ending cost for the same good or service, then multiply by 100 to convert this number to a percentage change. For example, if the CPI’s starting price for milk was $2.55 and it ended up $4.20, the inflation rate would be 2.35%.
The Bureau of Labor Statistics tracks a basket of goods that urban consumers buy, such as food, gas and computers, to figure out the inflation rate. It also reports the CPI by region to get a better picture of how different parts of the country are affected by inflation. Another measurement, the Personal Consumption Expenditures (PCE) price index published by the US Bureau of Economic Analysis, takes into account more categories of spending than the basket of goods tracked in the CPI and is weighted by data acquired through business surveys.
Inflation can harm shoppers, especially lower-income families, because rising prices erode the purchasing power of their incomes. It can also benefit companies that sell products with high demand if they can charge higher prices to cover increased production costs.
Some of the most volatile prices include food and energy which can spike up and down quickly due to supply chain issues or weather, so statistical agencies often report a measure called core inflation that excludes these prices for a clearer picture of long-term price trends.
