<p>The rate of inflation is a key macroeconomic indicator that measures the average annual change in the price of goods and services in an economy over a specific period. It is typically expressed as a percentage and is calculated using a basket of consumer goods and services, known as the consumer price index (CPI).</p>

<h2>How It Works</h2>
<p>The rate of inflation is calculated using the formula:</p>
<p><strong>Inflation Rate = [(CPI at the end of the period - CPI at the beginning of the period) / CPI at the beginning of the period] x 100</strong></p>
<p>For example, if the CPI was 100 at the beginning of the year and 105 at the end, the inflation rate would be:</p>
<p><strong>(105 - 100) / 100 x 100 = 5%</strong></p>
<p>Central banks use different measures of inflation, such as the personal consumption expenditure (PCE) deflator, to set monetary policy.</p>

<h2>Why It Matters</h2>
<p>The rate of inflation matters because it affects the purchasing power of money and can influence economic decisions. For instance, a high inflation rate can erode the value of savings and wages, leading consumers to spend more and save less. It can also affect borrowing costs and investment decisions. Therefore, central banks aim to maintain a low and stable rate of inflation, typically around 2% per year.</p>