The inflation rate measures how fast prices are rising and what that means for the economy. A higher inflation rate means it takes more money to buy the same goods and services, while a lower inflation rate means that purchasing power remains relatively stable. Understanding and properly managing inflation is a key ingredient to promoting a healthy, growing economy.
Every month, the Office for National Statistics checks prices on 700 items that make up a “basket of goods” designed to represent what people on average buy. This is the Consumer Price Index (CPI). Other countries and organizations track different items with their own variations of the CPI, like the Producer Price Index (PPI).
Inflation occurs when people’s demand for money grows faster than the supply. This causes a general rise in all prices and wages, and continues until the gap between the two narrows.
There are many underlying factors that can lead to inflation, such as government stimulus spending, central bank printing too much money and wars or natural disasters that increase production costs. Some economists argue that a moderate amount of inflation is healthy, because it signals that the economy is growing and that there’s a healthy level of demand for goods and services.
But high levels of inflation can be damaging, because they can erode the value of savings and investments. They can also affect retirement planning, as it may be harder to predict how much money you’ll need in the future if your income is increasing at a slower rate than your expenses.