What is inflation and how does it affect you?

Inflation is the word used to describe how much prices go up over time. The inflation rate is measured by the Office for National Statistics, who work out the cost of 700 things people often buy – these range from coffee and clothes to furniture and phone bills.

They then compare the overall cost of this ‘basket’ (also known as the Consumer Price Index) to what you’d pay for it last year. The change in price is turned into a percentage, which gives you the rate of inflation.

Use the Bank of England’s inflation calculator to see how much things have gone up over time.

At the minute, the 2021 inflation rate is 5.4% – the highest it’s been for 30 years. So, something that used to cost £10 now costs £10.54.

This is affecting everything from interest rates to the price of milk, and means that many people are feeling the squeeze of their household incomes.

The three main things that affect inflation are:

• Increasing costs of energy and fuel. Not only does this make heating your own home more expensive, but it means that the running cost of businesses such as hotels and restaurants also goes up. This increase in cost is then passed on to you as a customer.

• High demand. When businesses see a surge in the demand for goods, they usually have to raise their prices because they haven’t got enough of the products people want. This happened a lot during the coronavirus pandemic, when factories shut down and shipping routes ground to a halt.

• Low interest rates. Low interest rates make borrowing money cheaper and give people less motivation to save, because they won’t get much of a return on their money. This usually results in people spending more on certain things, which increases the price and then causes a rise in inflation.

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• We’ve got loads of advice on how to **make your money go further** and how to save money on your energy bills in our Learn library.