Inflation is a sustained rise in the general level of prices. One price going up — a single holiday fare or a new phone model — is not inflation by itself. Inflation is about the average of many prices drifting higher, so that the same money buys less over time.
How inflation is measured
Statistical agencies build consumer price indices from baskets of goods and services that represent typical spending. In the United States, the Consumer Price Index (CPI) from the Bureau of Labor Statistics is widely cited; the Federal Reserve also watches Personal Consumption Expenditures (PCE) inflation. In the United Kingdom, the Office for National Statistics publishes CPI and CPIH (which includes owner-occupiers’ housing costs). Headline rates include volatile items such as energy and food; “core” measures strip some of those out to reveal underlying momentum.
Indices are imperfect. Baskets lag changing habits, quality improvements are hard to price, and regional costs differ. Still, a consistent index is better than anecdote when comparing years.
Why inflation happens
Economists group causes loosely into demand-pull (too much spending chasing limited goods), cost-push (higher input costs passed along), and expectations-driven dynamics (if people expect rising prices, they build that into wages and contracts). Money and credit conditions matter because inflation is ultimately a monetary phenomenon in the medium run: when spending power grows faster than the economy’s ability to supply goods and services, prices tend to rise.
Short-run shocks — oil disruptions, supply-chain breaks, tax changes — can move measured inflation even when the underlying stance of policy is unchanged. Distinguishing one-off level shifts from ongoing inflation is a central task for the Bank of England and the Federal Reserve.
Targets and policy responses
Both the Bank of England and the US Federal Reserve pursue inflation targets around 2% (the BoE’s target is explicitly 2% CPI; the Fed’s longer-run goal is 2% PCE). When inflation runs hot, tighter monetary policy — higher policy rates, reduced balance-sheet support — aims to cool demand. Fiscal policy can reinforce or offset that effort through taxes and spending.
Who feels inflation
Inflation redistributes. Debtors may gain in real terms if debts are fixed in cash; creditors and cash savers lose purchasing power. Households that spend a larger share of income on essentials feel food and energy spikes more sharply. Indexation (of benefits, pensions, or contracts) softens the blow but can also embed inflation if it feeds a wage–price loop.
UK and US framing
UK inflation discussions often emphasise CPIH and the energy price cap’s role in recent cycles. US discussions often highlight shelter costs in CPI and the Fed’s dual mandate (inflation and employment). Cross-country comparisons should use consistent concepts and note exchange rates when converting values.
Related reading: monetary and fiscal policy, unemployment, and glossary entries for CPI, real interest rate, and purchasing power.
Sources
- ONS — Inflation and price indices
- BLS — Consumer Price Index
- BEA — PCE price index
- Bank of England — Monetary policy
- Federal Reserve — Monetary policy
Go deeper: Phillips curve, real interest rates, how to read CPI.