Inflation is a sustained rise in the general price level, measured by the change in the Consumer Prices Index.
Inflation is a sustained rise in the general price level over time. It does not mean every price rises. It means prices on average are going up, so each dollar buys less. Deflation is a sustained fall in the general price level.
Inflation is measured with the Consumer Prices Index (CPI). Officials survey households to find what a typical household buys. This list of goods and services is called the basket.
Each item gets a weight based on how much of their income households spend on it. Housing and food get large weights; matches get a tiny one. Prices of the items are checked regularly in many shops.
The cost of the basket in a base year is set to 100. If the index rises to 104 a year later, prices have risen by 4% on average. Inflation rate = (new CPI - old CPI) / old CPI x 100.
- Inflation
- Sustained rise in the general price level.
- Deflation
- Sustained fall in the general price level.
- CPI
- Weighted price index of a typical household basket; base year = 100.
- Inflation rate
- (new CPI - old CPI) / old CPI x 100.
Reading the weighted index
Step 1
Multiply each item's price index by its weight.
Step 2
Add the results: 10,900. Divide by the total weight of 100: the CPI is 109.
Meaning
Prices are 9% higher than in the base year on average. Clothing rose most, but food matters most because its weight is largest.
| Item | Weight | Price index this year | Weight x index |
|---|---|---|---|
| Food | 40 | 110 | 4,400 |
| Transport | 35 | 100 | 3,500 |
| Clothing | 25 | 120 | 3,000 |
| Total | 100 | - | 10,900 |
Worked example: Calculating inflation from the CPI
Suppose the CPI is 110 in 2025 and 113.3 in 2026.
- Change in CPI = 113.3 - 110 = 3.3.
- Inflation rate = 3.3 / 110 x 100 = 3%.
- Interpret: on average, prices in 2026 were 3% higher than in 2025.
- Note: the CPI of 113.3 does not mean inflation was 13.3% this year. It compares with the base year.
Watch out for this
If inflation falls from 5% to 2%, prices are falling.
Prices are still rising, just more slowly. Prices fall only when inflation is negative, which is deflation.
Check your understanding
The CPI rises from 120 to 126. What is the rate of inflation?
- 5%
- 6%
- 26%