The US inflation rate is a popular conversation these days as we have seen a gallon of gas rise from sub $2 levels to above $3 in some areas of the state. Lumber prices have also been a hot topic as COVID-19 caused a delay in some home projects due to lumber prices doubling in just a year. Our following several blogs are part of series: Personal Financial Planning 101. Join us as we begin the series by discussing inflation and how it is measured.
The Basics of Inflation
Inflation can be defined in two ways depending on which side of the coin you examine. First, the increase in the price of goods over some time is considered inflation. While also, the decline in purchasing power of a specific currency is considered inflation. When prices rise, your dollar does not buy as many goods. This is due to the dollar weakening against the cost of goods. If the dollar weakens, the price of goods increases. Conversely, when the dollar strengthens, the price of goods decreases. These events happen simultaneously, and one does not cause the other.
How the US Inflation Rate is Calculated
The average US inflation rate is between 2-3% annually. This number is calculated by measuring the change in the Consumer Price Index. CPI is a measurement of price for an average American basket of goods. The “basket of goods” is derived from the spending habits of the American consumer and includes items such as food, apparel, housing, medical care, education, transportation, etc. Every month, the government’s cost is examined by the government, and the change in CPI results in the recorded monthly inflation. While average inflation ranges from 2-3% annually, this number gets skewed for certain expenses. For example, medical care and education costs have some of the highest inflation historically.
US Inflation Rate – Summarized
- Inflation is the increase in the price of goods over some time
- Inflation is referred to as the decline in purchasing power of a specific currency
- The US annual inflation rate is between 2-3%
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Zachary A. Bachner, CFP®
With contributions by Robert L. Wink, Kenneth R. Wink, and James D. Wink.