Several factors go into inflated prices

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Inflation means the prices of general goods and services are going up over time.

This isn’t about the price of one or two specific items, such as oil and gas when a hurricane threatens the Gulf, but about an across-the-board general increase.

CAUSES OF INFLATION

Several factors go into inflated prices. Increased demand for goods and services can cause prices to rise, as can increased production costs. Monetary policy, such as economic policies surrounding interest rates and the money supply, can affect inflation. If the money supply grows too large relative to the size of the country’s economy, the value of currency goes down, meaning money buys less than it used to.

Expectations of inflation can also cause inflation. If the economy expects higher prices and builds those expectations into wage negotiations and other price adjustments, the price will then actually be higher.

MEASURING INFLATION

Government agencies conduct surveys to track the prices of commonly purchased items over time. In the U.S., this is called the consumer price index, or CPI, and the percentage change in CPI. Core consumer inflation excludes prices set by the government and more volatile categories, such as food and energy.

The Federal Reserve, which regulates U.S. monetary policy, seeks to maintain inflation at around 2% over the long run. However, it doesn’t just watch the CPI. The Fed tracks personal consumption expenditures (PCE), which account for how Americans are spending their money at a given time and adapts to spending patterns.

PREDICTING INFLATION

Some indicators of rising inflation are a lower unemployment rate, which is linked to higher wages. The difference in actual and potential gross domestic product (GDP) can indicate whether the economy is operating above or below capacity. Interest rates, exchange rates and commodity prices can also affect inflation.

That’s inflation at a macroeconomic scale. In your own household, you may notice higher energy prices, higher food prices and higher prices for other goods and services you regularly purchase. It is wise to plan for routine price increases along with any inflationary increases by adjusting your family’s budget.