What does the inflation rate measure?

The inflation rate measures the rise in price levels of goods and services over a specific period. This is a critical economic indicator as it reflects the purchasing power of currency; when inflation occurs, each unit of currency buys fewer goods and services than before. This measurement is typically expressed as a percentage increase from one period to another.

For example, if the inflation rate is 2%, this indicates that the general level of prices has increased by 2% compared to the previous year. Understanding inflation is vital as it influences monetary policy, consumer behavior, and overall economic stability. While changes in employment levels, stock market index growth, and economic growth rates are important economic metrics, they do not directly reflect the variations in price levels, which is the primary focus of the inflation rate.