Inflation

Inflation does not mean that every price goes up at once. Some prices rise, some fall and some stay the same. Inflation describes the average direction across the whole economy, usually measured by tracking the cost of a typical basket of goods and services, such as the Consumer Price Index.

Inflation is usually expressed as a yearly percentage. If the basket cost 1,000 last year and costs 1,040 this year, inflation is 4%.

Prices can rise for different reasons. When people and businesses want to buy more than the economy can produce, sellers raise prices; this is often called demand-pull inflation. When costs such as energy, raw materials or wages rise, businesses pass them on to customers; this is cost-push inflation. Expectations matter too: if people expect prices to rise, they may ask for higher wages and buy sooner, which can push prices up further.

Most central banks aim for low and stable inflation, often around 2% a year. Very high inflation damages savings and makes planning difficult. Falling prices, called deflation, can also be harmful, because people delay spending while they wait for prices to drop.