The inflation rate is the average percentage increase in the prices of a fixed “basket” of goods and services that people purchase on a regular basis. This includes everyday items like bread and a bus ticket as well as larger purchases like a home or car. It’s important to keep an eye on inflation, as it can erode the value of your money over time, which can make saving for future expenses more difficult. The higher the inflation rate, the faster your savings will depreciate.
A good rule of thumb is that inflation should stay around 2%. If the rate gets too high, it can cause a loss of purchasing power and slow economic growth.
Inflation is largely driven by the economic principle of supply and demand. When consumers want a particular item, the company producing it needs to hire more employees or make investments to increase production capacity in order to meet consumer demand. In turn, that can lead to higher wages and price increases. In contrast, if consumers aren’t demanding an item, the company can choose to halt hiring or even shut down completely and thereby decrease wages and prices.
The Office for National Statistics measures consumer inflation with the CPI-U, a basket of 700 items meant to represent what typical American households spend their money on. Economists also look at core inflation, which excludes volatile categories like food and energy that can fluctuate due to weather or supply chain issues.