Prices and Inflation

A single price jump is a relative-price move. Macroeconomists look for broad, sustained movement in the general price level and then identify its source.

The answer matters because inflation driven by excess demand behaves differently from inflation driven by supply disruption, and both differ again from price movements rooted in expectations or financial stress.

Inflation is a sustained rise in the general price level. Deflation is a sustained fall. Neither refers to a single price going up or down -- gasoline getting more expensive is not inflation by itself.

Central banks typically target low, stable inflation because both extremes cause damage. High inflation erodes purchasing power and makes planning harder. Deflation raises the real burden of debt and can stall spending as buyers wait for lower prices.

The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index are the two main gauges in the U.S. They overlap but weight items differently, which is why they sometimes tell slightly different stories.