The inflation rate measures the increase in prices of a set of goods and services over a specific period, most commonly a year. The Office for National Statistics compares the prices of a basket of 700 items that are designed to represent what the average person buys, such as bread and bus tickets. The price changes are then weighted, so while some items may spike the headline inflation rate only takes into account the change in the overall cost of the basket (eg housing costs vs recreation).

The COVID-19 pandemic and international factors like supply chain bottlenecks and the Russian invasion of Ukraine have driven up prices, pushing inflation to a peak in 2022. But actions by the Federal Reserve helped to tame prices, and the inflation rate has since fallen back below 2%.

During periods of high inflation, you lose the purchasing power of your money. This makes it harder to afford the things you need, which can lead to belt-tightening by consumers and pessimism about the economy as a whole. High inflation can also make it less profitable for businesses, which have to raise their prices to cover higher labor and raw material costs.

Inflation is an important factor to consider when creating a plan for your finances, including retirement savings and other goals. Even if you earn interest on your savings, inflation can make it difficult to keep up with your expenses, so it’s essential to factor in the expected inflation rate when planning for future purchases and saving.