Inflation is a concept that is very rarely out of the news agenda and is a very important one in demonstrating the economic state of the UK.
Every month a new inflation rate is measured showing the level of price rises in everyday goods which can impact several key decisions at the Bank of England.
Many people might wonder exactly how inflation works and how it is calculated.
How is inflation calculated?
On the Bank of England website, it states: "We know the rate of inflation because every month the Office for National Statistics checks the prices of a whole range of items in a ‘basket’ of goods and services.
"They record the cost of over 700 things that people regularly buy. The basket includes everyday things like a loaf of bread and a bus ticket. It also includes much larger ones, like a car and a holiday."
Based on this, the price of the basket tells them what the CPI (Consumer Price Index) is.
They add: "To calculate the rate of inflation, they compare the cost of the basket – the level of CPI – with what it was a year ago. The change in the price level over the year is the rate of inflation."
How does inflation work?
The Bank of England has a target for inflation to keep it around 2% as a low and stable rate helps create a healthy economy.
However, high and unstable rates of inflation can be harmful, as the Bank of England says that if "prices are unpredictable" then people might not be able to plan how much they can spend, save or invest.
In extreme cases "high and volatile inflation can cause an economy to collapse" due to very high price rises for daily goods.
Recommended reading:
- What adds the most value to a home? 8 things you can do
- What temperature should a UK house be? GP issues warning
- 3 foods which increase chances of longer life
What causes inflation?
Soaring food and energy bills are usually the factors that drive inflation up.
The traditional response to rising inflation is to put up interest rates, which makes borrowing more expensive.
When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here