The inflation rate is the percentage that describes how much prices for a basket of goods and services are rising over time. The Office for National Statistics checks the prices of 700 items in this ‘basket’ each month, weighting them by how much they are bought on average. This allows for a clear picture of how rising prices are impacting people’s purchasing power. Inflation can be a good thing for those who have tangible assets like property or stocked goods priced in their currency that they can sell at higher prices. But it can be a bad thing for consumers who need to spend their income on everyday goods and services.
A number of factors influence inflation, from the impact of supply chain shortages during COVID-19 to higher household demand, higher government spending and economic growth. Economists also look at core inflation, which excludes volatile spending categories such as food and energy to focus on the underlying trends in prices.
Inflation rates are important because as prices rise, one unit of money buys fewer goods and services. This affects everyone’s cost of living and can lead to slower economic growth. It can also lead to deflation, when prices fall, as was the case during the Great Recession in 2008.