EyeOnWhat it means
Statistical agencies measure inflation by tracking the prices of a basket of goods and services. The headline figure is the average change over a period, usually a year.
Your own experience may differ from the average, because your spending mix is different from the basket.
How it works
If your savings earn less than inflation, their buying power falls even though the balance goes up. If wages and benefits rise faster than prices, buying power improves.
Inflation can also affect loans: fixed-rate debt can become easier to carry in real terms if incomes rise, while variable rates often respond to inflation through central bank decisions.
A simple example
At a steady 3% a year, something that costs 100 today would cost about 134.39 in 10 years. Put another way, 100 in 10 years would buy what about 74.41 buys today. Real inflation varies from year to year; this is only an illustration.
Things worth checking
- Compare savings rates with inflation to see the real return.
- Long-term goals, such as retirement, may need larger sums than today's prices suggest.
- Different goods inflate at different speeds.
- A budget set once may need reviewing as prices change.
How it varies by country
Inflation is measured and reported differently in each country, and rates can differ significantly between regions.