Inflation

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

Inflation is the rate at which prices for goods and services increase over time which means your money buys less than it used to.

If inflation is 3%, something which cost £100 a year ago will cost £103 this year. 

Another way of thinking about it, is that your money loses purchasing power - a £20 note in your pocket won’t buy as much this time next year. 

It’s important to keep an eye on inflation because it should inform how you make financial decisions - if inflation is 3% and your savings account is only offering 2% then you are losing money even if the account balance is growing. This is why investing is so important, because the stock market historically outpaces inflation.

This is also important for longer term planning because the £50,000 you’ve saved for retirement won’t retain the buying power it has today. 

Central banks, like the Bank of England, try to keep inflation at around 2%. Too much inflation means everything gets expensive fast but too little (so prices actually falling) can cause economic problems as businesses struggle, unemployment increases and tax receipts dwindle. 

Inflation in the UK is measured by the CPI and RPI.

Love Eleanor. xxx