Inflation

Inflation is a rise in prices generally, not a rise in the price of any one thing. Rent going up is not inflation. Rent, groceries, insurance, haircuts and airfares all going up together is. The distinction matters because the causes and the remedies are completely different.

It is measured by tracking what a fixed basket of goods and services costs from one period to the next, and it is almost always quoted as a percentage change over twelve months. The Consumer Price Index is the best-known of those measures in the United States.

The most common misreading is to treat falling inflation as falling prices. It is not. If inflation drops from 6 percent to 3 percent, prices are still rising — just at half the previous pace. Prices actually falling is deflation, which is a different condition and generally a worse one, because people delay purchases when they expect things to be cheaper later, and that expectation feeds on itself.

Nor is the goal zero. The Federal Reserve aims for 2 percent a year over the longer run, on the view that a small, predictable amount of inflation leaves room to cut interest rates in a downturn and keeps the economy clear of deflation. Stable inflation is half of the Fed’s dual mandate; maximum employment is the other half.

The reason a low number still compounds into a large one is arithmetic. At the 2 percent target, the price level roughly doubles over a working lifetime. That is not a failure of the target — it is what the target means.