What does 'Inflation' mean?

Inflation is an economic term that refers to the general increase in the price level of goods and services in an economy over a period of time. In the UK, inflation is commonly measured by the Consumer Prices Index (CPI), which is published monthly by the Office for National Statistics (ONS). The CPI measures the change in the prices of a basket of goods and services that are typically consumed by households.

There are several factors that can contribute to inflation in the UK. One of the main causes is an increase in the money supply. When there is more money chasing the same amount of goods and services, the prices of those goods and services will tend to rise. Additionally, inflation can be caused by an increase in production costs, such as the cost of labor or raw materials, or by an increase in demand for goods and services.

Inflation can have several impacts on the UK economy and on individuals. High inflation can lead to a decrease in the purchasing power of money, which means that people have to spend more money to buy the same goods and services. High inflation can also lead to a decrease in savings and can increase the cost of borrowing money. Additionally, high inflation can lead to uncertainty and volatility in financial markets.

The Bank of England is the central bank of the UK, and it is responsible for setting monetary policy in order to control inflation. The Bank of England uses various tools to control inflation, such as setting the interest rate, buying and selling government bonds, and controlling the amount of money in circulation. The Bank of England’s monetary policy committee usually targets an inflation rate of 2% per year, which is considered a moderate level of inflation.

It’s worth noting that a moderate level of inflation (around 2%) is generally seen as a sign of a healthy economy, as it can indicate that demand is strong, companies are hiring, and wages are rising. However, too much inflation (above 3-4%) can be a sign of an overheating economy and can lead to economic instability. Additionally, too little inflation (below 2%) can indicate a weak economy with low demand, and can lead to deflation, a sustained decrease in the general price level of goods and services.