The inflation rate describes how quickly prices for goods and services are rising. It’s an important factor in determining people’s purchasing power, influencing economic growth and raising or lowering interest rates on national debt. There are many reasons why prices rise but one of the most common is a monetary policy that circulates too much money faster than the economy can produce goods and services. Another is events that raise production costs such as natural disasters or war.

Regardless of the reason, when prices rise the value of money decreases because one unit of currency will purchase less goods and services than before. This reduces the purchasing power of consumers and slows economic growth.

Consumers are the primary group who stands to lose when prices rise because their income won’t stretch as far and it makes buying big-ticket items such as cars or homes more expensive. Lower earners are also more vulnerable to inflation because they spend a higher percentage of their household budget on necessities such as food and energy which can spike with supply issues or seasonal factors. They are also less likely to own assets like real estate that could serve as a hedge against inflation.

The Office of National Statistics (ONS) compiles the inflation rate by examining the prices of a “basket” of goods and services that are purchased by an average person. The basket includes everyday items such as bread and milk but also larger purchases such as clothes and a car. The inflation rate is then compared to the same basket in a previous period and expressed as a percentage of change. Other measures of inflation include the personal consumption expenditures index (PCE) and wholesale price inflation which is calculated using prices at the producer level.