Loading the player...

DEFINITION of 'Price Inflation'

Price inflation is an increase in the price of a standardized good/service or a basket of goods/services over a specific period of time (usually one year). Because the nominal amount of money available in an economy tends to grow larger every year relative to the supply of goods available for purchase, this overall demand pull tends to cause some degree of price inflation.

The consumer price index (CPI) is the most common measure of price inflation in the U.S. and is released monthly by the Bureau of Labor and Statistics. 

BREAKING DOWN 'Price Inflation'

Price inflation can also be seen in a slightly different form, where the price of a good is the same year over year, but the amount of the good received gradually decreases. For example, you may notice this in low-cost snack foods such as potato chips and chocolate bars, where the weight of the product gradually decreases, while the price remains the same.

Price inflation is a critical measure for central banks when setting monetary policy. When price inflation is rising at a faster pace than desired, a central bank will likely tighten monetary policy by increasing interest rates. In an ideal world, this would encourage savings through higher returns and slow spending, which would slow price inflation.

On the other hand, should inflation remain subdued over a period of time a central bank will loosen monetary policy by reducing interest rates in the hope it incentivizes borrowing and investing to create price inflation. 

In general, a price inflation rate between 2 and 3 percent in the U.S. is considered desirable. 

RELATED TERMS
  1. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Base Effect

    The base effect is the distortion in a monthly inflation figure ...
  4. Real Interest Rate

    A real interest rate is one that has been adjusted for inflation, ...
  5. Inflation Hedge

    An inflation hedge is an investment that is considered to provide ...
  6. Zero Coupon Inflation Swap

    A zero coupon inflation swap is an exchange of cash flows that ...
Related Articles
  1. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  2. Investing

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  3. Insights

    Should You Worry About the U.S Inflation rate?

    Understand how inflation is measured, how U.S. inflation compares to other countries, and if investors should be concerned with rising inflation.
  4. Trading

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  5. Financial Advisor

    Why Inflation Feels Higher Than the Fed's Target Rate

    Follow the monthly readings on core PCE inflation in the Personal Income and Outlays reports to understand the Federal Reserve's inflation assessments.
  6. Insights

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  7. Retirement

    How Inflation Eats Away at Your Retirement

    When calculating how much money you need to comfortably retire, it's important to factor in how much inflation can chip away at your savings.
  8. Personal Finance

    Fight Back Against Inflation

    Inflation is often a consequence of economic recovery. Here's how you can protect your financial portfolio.
  9. Insights

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
RELATED FAQS
  1. What is inflation and how should it affect my investing?

    The rate of inflation is important as it represents the rate at which the real value of an investment is eroded and the loss ... Read Answer >>
  2. What is the relationship between inflation and interest rates?

    As interest rates are lowered, more people are able to borrow more money, causing the economy to grow and inflation to increase. Read Answer >>
  3. What's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ... Read Answer >>
  4. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center