An indicator of inflation is the change in the price of a standardized basket of goods and services, which has become a hot topic in recent years. This indicator is called the consumer price index (CPI). Inflation is another tool for monetary policy control, as central banks watch it for direction on changing interest rates. Despite the fact that the data is released once a month, it is often combined into quarterly reports and annual reports, and the year-over-year change is often discussed.

The CPI has two biases that make it unreliable. There is a substitution bias, which occurs when consumers switch their purchases based on demand elasticity. The second type of bias is a quality/new good bias, when the basket tracks price but ignores quality increases for specific commodities. There are many examples of this, such as how quickly technology has changed, such as the smartphone.

Inflation is the rate at which the general level of prices for goods and services rises over time, eroding purchasing power. Essentially, it means that a unit of currency buys less than it did before. Inflation can be caused by various factors, such as an increase in production costs (cost-push inflation) or high demand for products and services (demand-pull inflation). Central banks, like the Federal Reserve, aim to manage inflation to avoid excessive price increases that could destabilize the economy. Moderate inflation is considered normal in a growing economy, but if inflation is too high or too low, it can lead to problems such as reduced consumer confidence, slowed economic growth, or even deflation, where prices fall continuously.