The inflation rate is the average annual price increase of a basket of goods and services that are typically purchased by households. This index is used to gauge the overall cost of living and is tracked by everyone from individuals to governments and corporations. Inflation is a very important economic indicator and one that everyone should keep an eye on.
Generally speaking, a low, steady and predictable level of inflation is seen as beneficial to the economy. This is because relative prices send important signals about the economy and can help us make informed consumption, production, labor and investment decisions. A high or volatile inflation rate can distort these vital relative-price signals and lead people to make irrational and unsound economic choices.
Inflation can be caused by many things including a surge in government spending, too much money printing by central banks or events that raise production costs such as natural disasters. It is also possible for a country to experience deflation which can be very damaging to the economy and to the purchasing power of its citizens.
The Office of National Statistics (ONS) calculates the inflation rate by tracking the prices of a basket of goods and services that consumers purchase on an average basis. These include a range of everyday items such as bread and milk to larger expenses like holidays and cars. There is also a measure known as core inflation which excludes the prices of food and energy as these tend to be more volatile and not reflective of longer term trends.
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