Basically, inflation is the rate at which prices are rising.
It directly affects our overall cost of living and, if wages are not increasing at the same pace, the value of your money decreases.
It is impacted by lots of different factors including global conflicts – with the Ukraine war having a huge impact on food and gas prices in recent years. Some argue Brexit also had a negative impact.
In the UK, inflation is measured monthly – comparing how much prices are going up with the same time a year previous.
The headline inflation figure, which you’ll see a lot in the news, measures price rises across a range of products that we need in our daily lives.
The most commonly used inflation index is the Consumer Price Index (this is the update at 7am today) – and the target for many Western governments is 2%.
One thing to note is that falling inflation doesn’t mean prices are coming down – just that they’re rising less quickly. You’d need a minus figure, or negative inflation, to see prices fall overall.
Why does inflation impact interest rates?
The Bank of England raises interest rates to try to slow spending and encourage saving – when this happens prices/inflation tend to come down.
When inflation falls, interest rates tend to.
Potential winners and losers from high inflation
Overall, a high and volatile rate of inflation is widely considered to be damaging for the economy – but there are some people who could benefit from it.
Workers with wage bargaining power (perhaps those who belong to strong trade unions) can come off better as they can protect their incomes by bidding for higher wages.
Producers could end up benefitting if their prices rise quicker than their costs.
People with stocks or property could also see the value of their assets rise if there is a sustained period of price inflation.
However, retired people on fixed incomes are likely to be worse off as inflation cuts the real value of their pensions and other savings.
The poorest members of the population will also feel the pinch more as costs of borrowing, food and domestic utilities are high.
