What we are seeing is that the slowdown in home buying is making homebuilders more cautious. They're thinking twice before they dig holes in the ground. If the economy has indeed slowed down, it would mark another first for the Fed. The government measures inflation with the Consumer Price Index, which is a measure of the cost of a basket of goods that an average American might buy. The causes of inflation are often mysterious.
Inflation can have wide-ranging effects.
First, it makes business decisions and investments uncertain. If prices are changing, it's tricky for two firms to enter into a long-term contract. It's also difficult for people to plan for retirement, because they can't be sure how much their money will buy. Inflation hurts people on fixed-incomes because it means they can buy less. It tends to discourage saving and investment because when inflation hits, people rush to buy things before prices go up further.