Inflation

Inflation is measured by tracking the cost of a representative "basket" of goods and services over time. The most common measure for consumers is the Consumer Price Index (CPI). A related measure, the Personal Consumption Expenditures index (PCE), weights categories differently and is often preferred by central banks in the US. Both express inflation as a percentage change — say, prices are 3% higher than a year ago — rather than a dollar amount.

A crucial distinction is between headline inflation, which includes everything including volatile food and energy prices, and core inflation, which strips those two categories out. Because food and energy prices swing sharply with harvests and oil markets, core inflation is meant to reveal the steadier underlying trend. Economists read persistent core inflation as a stronger signal that a policy rate response is needed than a spike driven purely by an oil shock.

Inflation erodes purchasing power: suppose a basket of groceries costs $100 today; at 4% annual inflation, the same basket costs roughly $104 next year and $116 in four years — your money buys less without any change in the price tag you see on your paycheck. Deflation, the opposite, is a sustained price decline that sounds welcome but can delay spending and deepen recessions. Traders typically watch inflation releases closely on the economic calendar because they heavily influence central bank decisions and bond yields on the bonds page.