The inflation rate measures how much prices increase over time. A rising inflation rate is bad for most people because it means that one unit of money doesn’t buy as many goods or services as it used to. It’s important for consumers and investors to understand how inflation works so that they can make good decisions about their spending and investing.
There are several metrics that can be used to measure the inflation rate, but the most popular is the Consumer Price Index (CPI). CPI is a figure that tracks the average change in prices paid for a basket of economic goods and services purchased by households. This includes goods such as food, clothing, housing, transportation and education. Services such as medical care and recreation are also included in the basket of goods. The Office of National Statistics checks the prices of about 700 items in this basket each month. These prices include everyday items such as a loaf of bread and a bus ticket but also big expenses like a new car and vacations.
Some prices rise more quickly than others. For example, when there is a shortage of oil in the market, the price of gasoline spikes. These prices are reflected in headline inflation, but they are excluded from core inflation measurements that focus on the most important spending categories to get an accurate picture of long-term price trends.
Inflation can reduce the purchasing power of shoppers, especially lower-income shoppers. It can also cause people to put off purchasing bigger-ticket items such as homes or cars in favor of paying higher interest rates on their loans. It can also erode the value of savings and investments, making it difficult to reach financial goals over time. Investors need to understand how inflation affects the value of their returns so that they can make sound decisions about their investments.