- Inflation is a general rise in prices over time
- It is usually measured with a consumer price index based on a basket of goods and services
- The figure is an average, so your own experience can differ from it
The basic idea
Inflation means that prices across the economy are rising in general, not just the price of one product. When inflation is positive, the same amount of money buys a little less than before. When prices fall in general, economists call it deflation.
A single product getting more expensive is not inflation on its own. Coffee can become pricier because of a poor harvest while other prices stay the same. Inflation is about the broad picture.
How it is measured
Most countries measure inflation with a consumer price index. A statistics office defines a typical basket of goods and services that households buy: food, rent, transport, clothing, energy, healthcare and many other items. Every month it records the prices of these items in many shops and regions.
Each item has a weight that reflects how much of their budget households spend on it, usually based on household surveys. Rent and energy, for example, weigh more than matches or postcards. The index combines all these prices into one number, and the inflation rate is how much that number has changed.
Headline and core inflation
News reports often mention two figures. Headline inflation includes everything in the basket. Core inflation leaves out items whose prices jump around a lot, most often food and energy. Core inflation is not more important, but it can show the underlying trend more clearly.
Why it matters
Inflation affects how far wages and pensions stretch, how businesses set prices and how central banks make decisions. Many central banks aim to keep inflation low and stable, often around two percent a year, because both very high inflation and falling prices can cause problems for an economy.
Why your experience may differ
The official figure is an average for a typical household. If you spend a larger share of your budget on things whose prices are rising fast, such as rent or heating, your personal inflation can be higher than the official number. If you spend more on things that are getting cheaper, it can be lower.
This article is general information for learning purposes. It is not professional advice.