After decades of low and stable inflation, Americans have been struggling to keep up with the cost of living. In June, the year-over-year inflation rate reached 9.1%. It’s the highest in four decades, and it’s likely due to a range of factors, from international conflict to changes in what consumers purchase.
To measure inflation, the Office for National Statistics checks the prices of around 700 items in a basket that’s designed to represent what people buy on average. The basket includes everyday goods like a loaf of bread and bus ticket, as well as larger purchases such as a car or a holiday. The Office compares the price of each item in the basket to the same item in the previous year to calculate inflation. It then divides the change in price by the change in price in the previous year to get the annual inflation rate.
High and unpredictable inflation is viewed as harmful because it devalues the purchasing power of money, making it harder for people to buy things they need. It can also be disruptive for businesses, as their costs rise and their profit margins erode.
However, moderate inflation can be a good thing, as it helps boost spending when a country’s economy needs a pick-me-up. It can also benefit those with tangible assets, such as property or a stock portfolio, priced in their home currency, as it increases the value of their investments. And it can help rebalance wages by reducing the relative value of lower-wage workers’ salaries.
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