Inflation happens when the price of a basket of goods and services rises, so that one unit of currency buys fewer goods and services than it used to. This can have severe economic consequences, especially if it continues for a long time. Inflation is often the result of a nation’s monetary policy, which can be managed by central banks.

In order to measure the impact of price changes on a broader set of goods and services, statistical agencies usually create so-called price indices, which combine the prices of many different items into a single number that represents the average change in the price level of the basket over a certain period of time. The prices of the individual goods and services are weighted in the index to account for how much the average consumer spends on each item. The most commonly used price index in the United States is the Consumer Price Index (CPI). Other price indices exist, such as the Producer Price Index (PPI) which measures prices at the wholesale and production stages before consumers purchase them.

Because some prices move quickly due to short run supply and demand conditions in specific markets, most statistical agencies also calculate a so-called core inflation index which excludes those volatile items from the overall number. Central banks pay close attention to core inflation because it tends to be less affected by the short term supply and demand conditions in specific markets.