3. What are the causes of inflation? How is inflation measured?

What are the types of inflation indexes?

There are two primary ways of tracking inflation: one is focused on consumers, the Consumer Price Index (CPI); the other is focused on wholesalers, a Wholesale Price Index (WPI) or Producer Price Index (PPI).

Consumer Price Index

The U.S. Bureau of Labor Statistics uses what is called the CPI to measure inflation. It measures the CPI by looking at the price increases (or decreases) of goods and services across a variety of industries. The major industries included in this calculation are food and beverages, housing, apparel, transportation, education & communication, recreation, medical care, and other goods and services.
The Bureau of Labor Statistics has used CPI to track and report on the cost of living since 1913.

Wholesale Price Index or Producer Price Index

A Wholesale Price Index (WPI) is like the Consumer Price Index in that it tracks the change in prices of goods. However, rather than tracking price at the consumer level like CPI, WPI tracks changes at the wholesale level. It follows the price of goods sold in bulk from one company to another, not from a company to the consumer.
The United States used a Wholesale Price Index until 1978. After that, it changed the name to the Producer Price Index (PPI). The calculation for PPI is similar to WPI, but it includes the prices of services as well as goods.
The Producer Price Index is tracked by the Bureau of Labor Statistics and reported monthly.

How is inflation calculated?

To find out the inflation rate for any given year, you can use the U.S. Bureau of Labor Statistics (BLS) CPI Inflation Calculator. This calculator will tell you the change in the value of a dollar over a specified period.
The BLS uses the following calculation to determine the rate of inflation:
Inflation Increase = Final CPI Index Value / Initial CPI Value

How do I invest for inflation?

Savings and retirement accounts can take a hard hit from inflation.
Here’s an example for you:
Let’s say you put $100,000 into a savings account. And let’s say that 20 years from now, the cumulative rate of inflation is 50%. If your savings have not also increased by 50%, you will have lost money in real-dollar terms.
One way of hedging against inflation is to be invested in the stock market. This is because as inflation increases, the stock market tends to rise in value as well. (Investment returns are never guaranteed; all investments always carry risks.)
Of course, the economy could also experience deflation over the medium to long term — meaning the money in your savings account would be worth more in real terms — and/or the stock market could decline over a long period, though this is historically rare.
Another way to invest in protecting yourself from inflation is to invest in Treasury Inflation-Protected Securities (TIPS). TIPS are low-risk bonds that are indexed to inflation, meaning you aren’t losing money as inflation rises.