Inflation is an economic phenomenon when prices rise faster than people’s purchasing power. This can lead to higher interest rates and a slowdown in economic growth.
In the long run, inflation can make it harder to meet financial goals, such as saving for a home or retirement. Rising prices can erode savings or cause people to delay major purchases and turn to debt to fund them. This can have a profound impact on communities and families.
While there are many reasons for inflation, it often boils down to a conflict between two different forces: supply and demand. Supply describes how much of a good or service is available, while demand is driven by consumers’ purchasing habits. When demand outpaces supply, prices tend to increase—an event called “demand-pull inflation.”
The price index is a tool that tracks average changes in prices over time. A few common ones are the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures Index (PCE). These measure inflation at the point of sale, and focus on what consumers are paying for goods and services. Other types of inflation can be tracked by the GDP deflator, which measures changes in all the goods and services produced in an economy.
Inflation can also arise from rising input costs, such as oil or metals. This type of inflation is sometimes called cost-push inflation. McKinsey experts are focused on helping companies manage pricing in an inflationary environment. This includes accelerating the speed of decision making and creating teams that can plan options beyond price increases to reduce costs.