What is inflation? What causes it? Here's how it's defined and what the latest report means
The latest inflation readings showed a mixed bag as drops in grocery and used car prices balanced out increases in rent and gasoline.
Overall prices increased 3.4% from a year earlier, down from 3.5% in March, according to the Bureau of Labor Statistic's consumer price index, a gauge of goods and services costs throughout the economy. Meanwhile, on a monthly basis, costs rose 0.3%, below the 0.4% rise the previous month but above the 0.1% to 0.2% readings that prevailed last fall.
Grocery prices dropped 0.2% after flatlining the previous two months, gasoline prices rose 2.8% and used car prices declined by 1.4%. Rent, measured in March, rose .4% month over month.
Core prices, which strip out volatile food and energy items and are watched more closely by the Fed, increased 0.3% after three straight 0.4% bumps. Annual inflation by that measure fell to 3.6%, the lowest reading since April 2021.
The Federal Reserve's goal for annual inflation is 2%.
Protect your assets: Best high-yield savings accounts of 2023
But what is inflation? Why does it matter? Here's what you need to know.
What is inflation?
Inflation is the decline of purchasing power in an economy caused by rising prices, according to Investopedia.
The root of inflation is an increase in an economy's money supply that allows more people to enter markets for goods, driving prices higher.
Inflation in the United States is measured by the Consumer Price Index (CPI), which bundles together commonly purchased goods and services and tracks the change in prices.
A slowdown in inflation is called disinflation and a reduction in prices is called deflation.
What causes inflation?
Inflationary causes include:
- Demand pull: An inflationary cycle caused by demand outpacing production capabilities that leads to prices rising
- Cost-push effect: An inflationary effect where production costs are pushed into the final cost
- Built-in inflation: An increase in inflation as a result of people bargaining to maintain their purchasing power
Recently, some financial observers have assigned a new cause to the inflationary portfolio.
Independent financial research firm Fundstrat's head of research Tom Lee said on CNBC in March that corporate greed was a key driver to inflation.
What is hyperinflation?
Hyperinflation is the rapid and uncontrolled increase of inflation in an economy, according to Investopedia.
The phenomenon is rare but when it occurs, the effects are devastating. Hyperinflation in Yugoslavia caused people to barter for goods instead of using the country's currency, which would be replaced by the German mark to stabilize the economy.
Hungary experienced a daily inflation rate of 207% between 1945 and 1946, the highest ever recorded.
