Inflation measures the general rise in prices over time. Three common inflation indexes focus on different parts of the economy.
| Index | What it tracks | Best use |
|---|---|---|
| CPI | Prices paid by consumers | Cost of living |
| PPI | Prices received by producers | Input-cost pressure |
| GDP deflator | Prices of goods and services in domestic output | Economy-wide inflation |
Key differences:
- CPI uses a consumer basket.
- PPI captures price pressure earlier in the production chain.
- GDP deflator is broader and moves with the composition of GDP.
Inflation matters for interest rates, purchasing power, and valuation. It is also one reason money today is worth more than money later, which links directly to Time Value of Money.