Methodology
How is inflation measured?
The Consumer Price Index (CPI) is the most widely used measure of inflation. It tracks price changes across a representative "basket" of goods and services that typical households purchase.
The basket typically includes food, housing, transportation, healthcare, education, and recreation. The weights assigned to each category differ by country, reflecting local spending patterns.
Core inflation excludes food and energy prices, which tend to be highly volatile. Central banks often focus on core inflation as a better guide to underlying price pressures and when setting monetary policy.
The Personal Consumption Expenditures (PCE) price index is used by the U.S. Federal Reserve as its preferred inflation gauge. Unlike CPI, the PCE updates its basket weights more frequently to reflect actual consumer spending patterns, and tends to run slightly lower than CPI.
Differences arise from varying monetary policy stances, exchange rate regimes, trade dependencies, energy import exposure, domestic demand conditions, supply-chain factors, and wage-setting mechanisms. Countries with commodity-import dependence are particularly exposed to external price shocks.
Hyperinflation is typically defined as monthly inflation exceeding 50%. Historical examples include Germany (1923), Zimbabwe (2008–2009), and Venezuela (2016–present). It is usually caused by rapid, uncontrolled money creation, loss of confidence in the currency, and supply-side collapse.
What is a "good" inflation rate?
Most central banks target an inflation rate of around 2% annually. This level is considered consistent with stable prices while leaving enough buffer to avoid deflation, which can be equally harmful.
Most central banks target an inflation rate of around 2% annually. This level is considered consistent with stable prices while leaving enough buffer to avoid deflation, which can be equally harmful.