Inflation basics
What is inflation? A plain-English guide
Understand what an inflation rate measures, how prices compound, and what the headline means for everyday spending.
The price and the pace are different
Inflation measures the increase in prices over a period of time. A price tells you what something costs; an inflation rate tells you how quickly that cost is changing. The IMF’s introduction to inflation explains this distinction for both broad baskets and individual categories.
Follow a $100 basket
Imagine a basket that costs $100 today. If its price rises 5% over the next year, it costs $105. If it rises another 5% the following year, it costs $110.25. The second increase applies to $105, so the combined increase is 10.25%, rather than 10%. These are illustrative numbers, not reported inflation data.
Read the period before the percentage
“Up 3%” needs a starting point. A change since last month answers a different question from a change since the same month last year. Before comparing two numbers, check that they describe the same basket and the same time interval. Write the start date and end date alongside each percentage to avoid mixing comparisons.
Turn the headline into a useful question
For a household example, suppose the same purchases cost $2,000 last year and $2,100 this year. That basket rose 5%. If spending instead rose because you bought more items, the extra spending alone does not tell you the price increase. Separating quantities from prices makes your comparison more useful.
Explore the numbers
Start with the inflation calculator to compare dollars across years. Then read how to read CPI for the measurement behind the comparison. Treat these tools as a way to understand a broad trend; the cost of your particular shopping list can differ.