Final answer:
True, the inflation rate measures the annual rate of increase in average prices of goods and services in an economy. Inflation indicates a decrease in the purchasing power of money, where CPI is often used to gauge this change in prices.
Step-by-step explanation:
True: The inflation rate is indeed the rate of increase in average prices of goods and services over a specified period, usually a year. Inflation is defined as a sustained increase in the general level of prices for goods and services and is measured as an annual percentage increase. Consequently, as inflation rises, the purchasing power of a currency falls, making it so that each dollar buys a smaller percentage of a good or service.
Measuring inflation involves tracking the prices of a broad mix of goods and services in an economy over time. This task is complex due to continual fluctuations in prices affected by supply and demand. Economists simplify this challenge by combining the various goods and services prices into a single price level. The inflation rate is thus the percentage change in this compiled price level over time.
To obtain a practical measure of inflation, a method used is the consumer price index (CPI), which reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services. These baskets are often fixed or updated at specified intervals, such as yearly, to reflect changes in consumer habits or the introduction of new goods and services.