Inflation is a measure of how much prices are rising over time, and it’s tracked by indices like the Consumer Price Index (CPI). The rate is typically measured over a 12-month period. To calculate inflation, the Office for National Statistics compares prices on 700 items in a basket of goods and services that’s designed to represent what people buy on average. The basket includes everyday items, such as bread and a bus ticket, along with larger ones like a car or a holiday. The basket is weighted so that housing-related costs, for example, have more influence than leisure-related expenses.
A rise in inflation is considered bad because it erodes the purchasing power of money. This means that a person’s money will only buy fewer and less valuable goods over time. It can also affect businesses, as it makes investing in new projects and hiring staff more difficult. This is why central banks, including the Federal Reserve in the US, watch inflation rates closely.
In addition, rising inflation can worsen inequality by pushing the cost of basic necessities up for lower-income households. That’s because it takes more of their income to purchase essentials, while wealthier households have more leeway and can absorb the extra cost. Inflation can also be caused by monetary policy, as when central banks increase the supply of money in an economy, it can drive up prices and wages.
Inflation is a constant challenge for governments, business owners and workers alike. It’s a complex phenomenon that can be hard to predict, and it often surprises everyone. That’s why we need to ensure we’re using the best data available to track it and to understand its impact on our lives.
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