The rate at which prices change can have a big impact on the economy — it affects how much money people have in their pockets, can slow or boost economic growth and may raise or lower interest rates on debt. The best way to measure inflation is with the Consumer Price Index (CPI), which tracks price changes for a basket of goods and services that most consumers use every day.
Several factors influence the overall inflation rate, including the amount of money in circulation and government spending. But the biggest drivers are events that increase demand for a good or service, such as a war or natural disaster, or that raise production costs. This is known as demand-pull inflation.
Inflation isn’t just a problem for consumers: It also can make it difficult to save for emergencies or retirement, since the interest you receive on a savings account usually won’t keep pace with inflation. That’s why it’s important to bake in a realistic inflation rate when creating a financial plan to reach your goals.
Inflation has slowed since peaking in the early 2021, with core CPI (excluding food and energy) up 0.3% between June and July of this year. But that doesn’t mean we’re out of the woods: Many items exposed to tariffs accounted for a portion of the recent rise in core goods prices, including sporting equipment and apparel, and window and floor coverings. But the weighting system in the CPI, which is based on how much each item typically costs average consumers, means these items will have a smaller effect on headline inflation than a bigger-ticket item like a car.
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