What is Inflation?

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What is inflation?

Simply put, inflation is a gradual increase in prices over a period of time. When considering inflation in financial calculations, you are altering the results of your calculations based on the expectation that prices will rise in the future.

There are two distinct measures of inflation that are typically used in financial calculations; the Producer Price Index (PPI) and the Consumer Price Index (CPI). The CPI, as the most widely used measure of price change, is often used in escalation agreements to adjust payments for changes in prices. An excellent reference for information about CPI is available from the US Bureau of Labor Statistics.

Throughout this site you will be asked to enter an estimated annual inflation rate in many applications. It is suggested that you use the CPI as your estimate. Although this measure is not perfect and is actually different for everyone, this is still the best and most studied measure of inflation available.

For more information on various inflation related topics, try one of the links below:

How to use CPI in your estimates
How the Bureau of Labor measures CPI
Advanced users: How to use CPI for your situation.

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