What is inflation, and how do economists measure it?

Inflation is the increase in the prices of goods and services over time. It is a general rise in the overall price level, not a rise in the cost of one product or a handful of products, according to the [federalreserve.gov](https://www.federalreserve.gov/faqs/economy_14419.htm) explainer. Put another way, it is a general decrease in the value of money, as the [congress.gov](https://www.congress.gov/crs-product/IF10477) overview puts it. It is usually measured with a price index, and the percentage change in that index over a period, most commonly a year, is the inflation rate. [1] [2] [3]

Measurement starts with a basket of goods and services meant to represent what households typically buy. The [clevelandfed.org](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/how-is-inflation-measured) explainer says the basket does not contain every item but is meant to reflect both the types and quantities that households consume. Agencies calculate what the basket costs at today's prices and what it cost in a base period. The index is the ratio of the two. [4]

The index itself shows the price level, not inflation. Inflation is the growth rate of the index. The [imf.org](https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/inflation) gives a simple example: if the base-year consumer price index (CPI) is 100 and the current value is 110, inflation is 10 percent. The [congress.gov](https://www.congress.gov/crs-product/IF10477) overview gives a real case: a CPI of about 311 in February 2024 and about 320 in February 2025 amounts to roughly 2.8 percent over those 12 months. [3] [2] [4]

Different indexes track different products and weight them differently, so the Federal Reserve monitors several ([federalreserve.gov](https://www.federalreserve.gov/faqs/economy_14419.htm)). The CPI and the personal consumption expenditures (PCE) price index focus on household baskets. The producer price index covers prices received by domestic producers. The GDP deflator is the broadest, covering domestically produced goods and services ([clevelandfed.org](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/how-is-inflation-measured)). In the United States the Bureau of Labor Statistics and the Bureau of Economic Analysis are the agencies involved. [1] [4]

The designs also differ. The CPI uses a mostly fixed basket, while the GDP deflator lets its composition shift with spending patterns ([congress.gov](https://www.congress.gov/crs-product/IF10477)). Analysts also separate headline inflation, which covers the full basket, from core inflation, which leaves out food and energy because their prices are volatile. The congress.gov overview notes that headline inflation can better reflect the price changes people actually face, while the [imf.org](https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/inflation) adds that core measures also exclude government-set prices. [2] [3]

The ideal is to compare the price of identical goods over time, but the [congress.gov](https://www.congress.gov/crs-product/IF10477) overview calls this nearly impossible. Quality changes, so part of a price rise may reflect a better product rather than inflation. New products also appear and enter fixed baskets only slowly. Statistical agencies adjust for both, and the overview says that if these factors were not handled correctly, measured inflation would be inaccurate and most likely overstated. [2]

Inflation also explains why money figures are adjusted. The same overview says about $355 in 2023 was needed to buy what $100 bought in 1980. Figures adjusted this way are called real, and unadjusted ones are nominal. [2]