Inflation affects everything from mortgages, pensions and benefits to the price of train tickets So, what is inflation and what impact does it have?
Inflation affects everything from mortgages, pensions and benefits to the price of train tickets.Inflation is the rate at which the prices for goods and services increase.
That's why most countries' central banks have an inflation target of between 2% and 2.5%. In the UK, the target is 2%.How is inflation measured?It produces three main estimates of inflation:the Retail Prices Index It looks at the prices of thousands of things consumers commonly spend money on, including cinema tickets, bicycles, and even smart-speakers.
RPI, a measure that has fallen out of favour with economists, includes some housing costs but doesn't account for some people switching to cheaper products when prices rise.Inflation is one key factor the Bank of England considers when setting the"base rate". That influences what interest rate banks can charge people to borrow money, or what they pay on their savings.
Repayments on student loans, bonds issued by government and some train ticket prices rise in line with RPI, which tends to be higher.It's important to keep in mind that inflation is only an average rate that looks at certain products.It can benefit borrowers. For example, anyone with a fixed-rate mortgage benefits from inflation, as it effectively reduces their debt.Governments might also benefit as high inflation eats away at the value of their debts.
It can happen if a government prints more money to pay for its spending. As there's a larger supply of money around, prices increase, and so the government prints more money.The most famous example came when, after World War One, Germany was left with high debts. The government printed more of its own currency to pay them off.
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