Definition: Inflation is when the general prices of goods and services increase overtime meaning that over a prolonged period your money will buy less than it used to.
Example: If your food shopping costs £25 today but next year it costs £27.50, the prices has increased by 10%
How is inflation measured: Inflation is usually demonstrated with percentage changes based on the change in prices of goods and services using the Consumer Price Index (CPI).
How does it affect us:
When inflation rises:
- Our food shopping cost rises
- Fuel and energy bills can increase
- The cost of housing may increase
- The cost of goods and services rises
- Money has less purchasing power.
Why does inflation occur:
Demand-Pull inflation – When people want to buy more goods and services than businesses can supply
Cost-Push inflation – When it is more expensive for businesses to produce or transport products, producers can pass the cost on to consumers thus the price rises.
Rising wages – Higher wages can increase people’s spending power but they can also increase businesses costs lowering their profit margin.
Supply problems – Shortages of raw materials, energy or products can push up prices