What is inflation? This is what can happen if the rates are too high or low

Throughout the year you will notice news outlets reporting on the rise or fall of inflation on several occasions, but what is it?

Inflation is when the price of household and everyday items are measured – this can be anything from food to haircuts and train tickets.

The items are then compared to how much they cost today compared to the same time a year ago.

The average increase in prices is known as the inflation rate, reports the Bank of England.

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The financial experts explained: “So if inflation is 3%, it means prices are 3% higher (on average) than they were a year ago.

“For example, if a loaf of bread cost £1 a year ago and now it’s £1.03 then its price has risen by 3%.”

The UK government sets the inflation target of 2% for banks – this is to “keep inflation low and stable” whilst also “helping everyone plan for the future.”

How is inflation measured in the UK?

The Bank of England adds: “Each month, the Office for National Statistics (ONS) collects around 180,000 prices of about 700 items.

“They use this ‘shopping basket’ to work out the Consumer Prices Index (CPI). CPI is the measure of inflation we target.”

What happens if inflation is too high or too low?

If inflation rates are too high or it is moving up and down a lot, this can make it hard for businesses to “set the right prices and for people to plan their spending.”

The Bank of England comments: “But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall.

“Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs.”