Inflation rate is a measure of the increase in the prices of a basket of goods and services that people need to survive. The Bureau of Labor Statistics calculates the inflation rate using price data collected in the United States and reports it on a monthly basis. The CPI measures changes in the cost of 700 products and services that consumers purchase on average. The items include everyday products like bread and a bus ticket, as well as larger expenses like a car and vacation.
A slow, steady rate of inflation is considered healthy for an economy. It signals growth and a healthy demand for goods and services, and it can help to reduce unemployment, as employers hire workers to replace those who leave the workforce in response to higher prices.
On the other hand, high inflation can be dangerous, as it causes money to lose its purchasing power and reduces the value of savings. It can also discourage investments, and it may force businesses to raise prices and wages to offset rising input costs.
Inflation also creates a distortion of essential relative-price signals that would otherwise guide consumer, business and production choices. As a result, people may shift their resources away from activities that foster production and long-term economic growth in favor of protecting or increasing the value of their assets.
Investors can diversify their portfolio with assets that are more inflation-tolerant, such as real estate or commodities. Investing in companies with solid earnings growth can also help to hedge against inflation. SmartAsset’s free tool matches you with vetted financial advisors in your area who can help you build a sound financial plan and invest your money to help protect it against inflation.
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