Inflation, Deflation & Consumer Price Index Explained

Inflation is a rise in price among general goods and services in the economy over a period of time. Inflation, and its opposite, deflation, have a correlation between the availability of currency and/or the amount of money needed within an economy, as well as economic demands.

Key Indicators of Inflation:

  • A persistent increase in the price of goods and services
  • When prices rise, each dollar buys less
  • Creates a decrease in the value of currency
  • More currency is created and made available
  • Mild inflation can encourage economic growth
  • If controlled, can hedge against short-term volatility in economy

Key Indicators of Deflation:

  • When prices decrease, dollars buy more
  • Creates an increase in the value of currency
  • The amount of currency available is decreased
  • Caused by prolonged recession, economy shrinks repeatedly due to decreasing prices encouraging consumers to hold onto their money
  • Usually when unemployment is on the rise

What is the Consumer Price Index?

The consumer price index (CPI) is an index that measures price increases and decreases of goods and services in the economy and computes a percentage change. The CPI index is the general measure of inflation in the United States.