What is the definition of the inflation rate?

The inflation rate is the average rate at which prices increase and purchasing power falls. With a yearly inflation rate of 4 percent, customers can buy 4 percent less this year than they could last year with the same amount of money.

Several indexes measure the inflation rate, such as the Consumer Price Index, the Producer Price Index and the Personal Consumption Expenditure. These indexes differ in what goods they use to measure prices and in whether the goods in the so-called market basket change throughout the years. To maintain a strong economy, the Federal Reserve aims for an annual inflation rate of 2 percent, using the Personal Consumption Expenditure.