2. Is inflation always a bad thing?
No. In a growing economy, some inflation is to be expected as wages rise and demand for goods and services increases. (A general decline in prices, or deflation, is a sign of a weak economy.) The key issue is the rate of inflation. If the pace of price growth surges above that of wages, the average person’s purchasing power is reduced, and households and the broader economy suffer. The Federal Reserve Bank of Dallas found that from mid-2021 to mid-2022, American workers faced the biggest decline in real wages in about 25 years — roughly 8.5% with inflation factored in. Independent central banks consider it their most important mission to keep inflation in check. They set interest rates and use other policy tools to try to keep inflation at what’s seen as a healthy rate. In much of the developed world, including the US and the European Union, that ideal rate is seen as 2%.
One of the biggest challenges facing the post-pandemic world is how to tame inflation. After governments spent freely to offset the economic fallout of the Covid-19 pandemic, prices began to climb at the fastest pace in decades and central banks embarked on the most aggressive and synchronized monetary policy tightening in 40 years. When prices surge, people can afford less, businesses struggle to control costs and, in extreme cases, political revolutions are born.
1. How is inflation measured?
At the most basic level, inflation is an increase in overall prices in an economy over a period of time — monthly or annually, typically — and an accompanying decrease in purchasing power. One common way to measure it is by tracking the change in the cost of a basket of goods purchased by a typical household, including food, housing and basic services. Leading economists surveyed by the World Economic Forum in September warned that today’s rising prices will likely cause social unrest in low-income countries. The French Revolution was triggered, in part, by the rising price of bread.
