You read that inflation is down, then pay more for the same groceries than you did a year ago. Both can be true. The price level tells you how much a basket costs. The inflation rate tells you how fast the cost is changing.
How a rate can fall while prices rise
The European Central Bank explains inflation using a basket of goods and services. A price index tracks how the basket’s cost changes. A 12-month inflation rate compares the index for a given month with the index for the same month a year earlier.
Imagine a basket with a price index of 100 at the start. After a year of 10% inflation, the index reaches 110. In the second year, inflation slows to 5%. That increase applies to 110, so the index reaches 115.50. The figure uses invented numbers.
The inflation rate fell by five percentage points, from 10% to 5%. The basket became 5% more expensive in the second year and 15.5% more expensive across both years.
What zero or negative inflation looks like
If the index stayed at 110 in the second year, inflation for that year would be zero. The basket would still cost 10% more than at the start. If the index fell from 110 to 104.50, the rate for that year would be −5%, and the basket would still be 4.5% dearer than at the start.
The Bank of England uses deflation to describe prices falling broadly and continuing to fall. A discount on a single item tells you how that item’s price changed. The index tracks what happened across the basket.
Why your household may see a different change
Statisticians give prices different weights according to their share of household spending. If a household spends a larger share on rent than the basket assumes, a rise in rent can weigh more heavily on that household’s budget.
The measure also matters. The UK Office for National Statistics explains that CPIH extends CPI to include a measure of owner occupiers’ housing costs and Council Tax. Check which index a report is using before comparing its figure with another.
Four checks for an inflation headline
- Look for the price index and the basket it covers.
- Check the period. To see what happened since last month, look for a month-on-month figure.
- Check the sign. A lower rate can still be positive.
- For the change over several years, compare the index at the beginning and end of the period.
Sources & further reading
- European Central Bank: What is inflation?
Explains weighted baskets, annual inflation and why households can experience different price changes.
- Office for National Statistics: Consumer price indices, a brief guide
Describes the UK consumer price indices and how their spending coverage and weights differ.
- Bank of England: What is deflation?
Explains deflation and distinguishes broad price falls from occasional discounts.