What is inflation?
Inflation is the rate of increase in the prices of goods and services. It is expressed as a percentage. If inflation is 3%, this means that, on average, the price of goods and services is 3% higher than it was a year earlier.
Limited inflation encourages people to spend sooner, which is good for economic growth – if consumers or business anticipate that prices will fall in the future, they are likely to hold off on spending.
How is inflation calculated?
Every month, a team of specialists from the Office for National Statistics (ONS) collects around 180,000 separate prices of about 700 items covering everything from food and drink to clothes, furniture and train fares.
This ‘basket of goods’ is used to calculate the Consumer Prices Index (CPI). The ONS publishes an updated rate every month. This is the inflation measure used in the Government’s inflation target (but there are other measures of inflation).
What is the inflation target?
The Government sets an inflation target for the Bank of England.