The inflation rate describes how fast prices rise. It affects many aspects of the economy, from people’s purchasing power to how much it costs to make money by investing it. Understanding the effects of inflation can help you plan for your future expenses.

The government tracks the prices of a “basket of goods and services” that represents what most consumers buy to determine the inflation rate. For example, a gallon of milk goes from $2.55 in January 1996 to $4.20 in January 2023. You can find this information in the Consumer Price Index, which is calculated from government datasets each month and published by the Bureau of Labor Statistics. To calculate the inflation rate, you simply subtract the CPI for the starting year from the one for the ending year.

While some people may dislike the effects of inflation, others benefit from it. Businesses that have raw materials or inventory priced in a country’s currency might like the idea of inflation because it can increase the value of their assets. Individuals with a lot of savings in the bank might also want a little inflation, as it increases their spending power over time.

However, when the inflation rate becomes too high, it can destroy a nation’s currency and lead to economic instability. When a country experiences galloping inflation, it can lead to a loss of confidence in its currency, which can cause investors to avoid the market and discourage international investment. In addition, if prices rise too rapidly, wages won’t keep up with the cost of living, and people can’t afford essential products or services.