Inflation can erode the purchasing power of savings or the value of pensions and wages, so it is watched closely by policymakers. Inflation rates are determined by comparing the prices of a set of goods and services, often called a basket of goods, to the same items in previous months or years. Government agencies like the Bureau of Labor Statistics (BLS) create a variety of price indices to help track these changes. The most popular and widely reported is the Consumer Price Index (CPI).

The CPI includes all of the items that people buy on average, from a loaf of bread to a pair of shoes to a bus ticket. It also reflects the prices of many services, including medical care, transportation, and housing. A similar measure, the Producer Price Index (PPI), tracks price changes at the wholesale and manufacturing stages before they reach consumers.

While all prices rise over time, different prices change at different paces. Some, such as the prices of traded commodities, may change every day. Other prices, such as wages established by contract, can be “sticky” and take longer to adjust. The unevenly rising prices that characterize inflation erode the real purchasing power of some consumers, which is why inflation is so bad for them.

Moreover, some categories of items, such as food and energy, are more volatile than others, and can be influenced by weather or temporary supply conditions. For these reasons, most statistical agencies also report a measure of core inflation, which excludes these more volatile components from the overall price index. This helps to give a clearer picture of long run inflation trends.