Inflation

Prices rising together

One price going up (say, avocados after a bad harvest) isn't inflation by itself. Inflation is the general price level rising: bread, gas, rent, haircuts and thousands of other things creeping up over time, on average.

The flip side is purchasing power, how much a dollar can buy. When prices rise, the $100 bill in your drawer still says $100, but it buys less than it did.

The grocery cart example

Picture a cart of groceries that costs $100 today. With 3% inflation over a year, the same cart costs about $103 next year. Your $100 now buys about 97% of that cart.

That's only an example, not a forecast. In real life, prices move at different speeds, and some even fall (TVs and many electronics often get cheaper).

Why prices climb

Economists usually describe two simple causes:

• More money chasing the same stuff (demand-pull): if people have more money to spend but there aren't more goods, sellers can raise prices.
• Higher costs (cost-push): if it costs more to make and ship things, for example because energy or wages rise, businesses pass some of that on.

Expectations matter too: if everyone expects prices to rise, businesses and workers plan for it, which can keep inflation going.

How it's measured, and the 2% target

In the US, the Bureau of Labor Statistics publishes the Consumer Price Index (CPI) every month. It prices a huge basket of goods and services that people buy, from food to rent to medical care, and tracks how its total cost changes.

The Federal Reserve aims for inflation of 2% a year over the longer run. Low and steady inflation makes planning easier, and a little above zero gives room to cut interest rates when the economy slows. The Bank of Canada also targets 2%, the middle of a 1 to 3% range.

Try it yourself

Look up the BLS CPI Inflation Calculator (bls.gov) and type in a year you remember, like the year you were born. See what $100 then would cost today. Or compare a receipt from a few years ago with what the same items cost now.

Good to know

• The 3% example is illustrative, not a forecast; individual prices rise at different rates and some fall.
• The causes are simplified to "more money chasing the same stuff" and "higher costs"; expectations and other factors matter too.
• The CPI in the news is usually CPI-U (all urban consumers), released monthly by the BLS.
• The Fed's 2% goal is officially measured with the PCE price index, not the CPI.
• The Bank of Canada targets 2% total CPI inflation, the midpoint of a 1 to 3% range.
• Educational only, not financial advice.

Why it matters for you

Money sitting still loses buying power over time. That's why the next idea, interest, matters: it's what you earn for lending money, or pay for borrowing it, and comparing it with inflation tells you whether your savings are really growing.