Inflation: Why Your Dollar Buys Less

Inflation is a broad rise in the overall prices of goods and services over time—not just one sandwich becoming more expensive. The Federal Reserve explains why one product or a few products are not enough, by themselves, to measure inflation. 1

The Consumer Price Index, or CPI, follows the average change in prices for a representative basket of consumer goods and services. The U.S. Bureau of Labor Statistics says that basket includes categories such as food, housing, transportation, medical care, education, and communication. 2

When prices rise broadly, the same number of dollars can buy fewer goods and services. That is a change in purchasing power. The CPI is useful for describing an average, but it is not a personal score: BLS notes that a particular household's experience can differ depending on what it buys.

A slower inflation rate means prices are rising more slowly; it does not necessarily mean prices have returned to an earlier level. The Federal Reserve says that low and stable expected inflation helps households and businesses make sounder decisions about saving, borrowing, and investing. 3

This show is educational only and is not registered investment advice. The examples are made up for learning, not a recommendation or a personal financial plan.