Prices rising, year on year:the same note buys less, that's clear.
A sustained increase in the general price level of goods and services, eroding purchasing power.
Central banks raise interest rates to combat inflation, which often strengthens the currency.
In plain words
Inflation is a general rise in prices over time, which means the same amount of money buys less than it did. It is usually measured by pricing a fixed basket of everyday goods and services and comparing its cost with a year earlier.
See it move
Basket this year: the largest here
Why it matters
Many central banks aim to keep inflation low and stable, and they adjust interest rates in response to it. Inflation releases therefore affect expectations about rates, which currencies and other markets respond to.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An invented basket of goods costs 200 one year and 206 the next, while savings of 1,000 earn 1% interest.
- 1Rise in cost206 − 200 = 6
- 2Inflation rate6 ÷ 200 = 0.03, or 3%
- 3Savings after interest1,000 × 1.01 = 1,010, a rise of 1%
Prices rose 3% while the savings grew 1%, so the savings buy less than they did a year earlier.
A common mistake
Lower inflation does not mean that prices are falling. If inflation drops from 5% to 2%, prices are still rising, only more slowly; a general fall in prices is called deflation.
Check yourself
Educational information, not investment advice or a recommendation to trade.