Persistent increases in
the costs of goods and services
Persistent decreases in
the buying power of the dollar
Either way, inflation is the opposite of
stable prices, and over time can erode the purchasing power of
your money. For example, you can buy somewhat less with a dollar
today than you could have bought five years ago, and significantly
less than you could have bought fifty years ago. So if you have
the same amount of income each year, your purchasing power gradually shrinks.
The
inflation rate varies from year to year, and since 1926 has averaged
3% annually. That includes the high point, in 1980, when it
hit 14%, and several periods of disinflation,
when inflation hovered around 1% and prices remained steady. Several
years have also witnessed deflation,
when the cost of goods and services actually dropped. While deflation
seems to increase your buying power, it's often accompanied
by rising unemployment and falling production — which can
create serious economic problems.
Many factors influence the rate of inflation,
from overall economic conditions and consumer spending to monetary
policy and the political outlook.
The consumer price index (CPI) is the most widely used
measure of inflation. The index is figured each month
by computing the percentage of price changes for 80,000
different goods and services. The CPI is used as a
benchmark for determining adjustments to new labor
contracts, Social Security payments, and tax brackets.
Some economists, however, believe that the CPI regularly
overstates inflation by 1.5%.
The
inflation rate varies from year to year, and since 1926 has averaged
3% annually. That includes the high point, in 1980, when it
hit 14%, and several periods of 