Glossary Rate of Inflation

Rate of Inflation

The Rate of Inflation is the rate at which prices are rising within the economy in general within a one year period. It is regarded as one of the most important economic indicators.

Of course, it is not practical to measure changes in price for all goods which are sold within an economy so governments measure inflation by taking a basket of typical goods, products which would regularly be bought by ordinary households within the country, and monitoring prices for the products within it.

Low rates of inflation are today considered normal in the developed world. In modern times, it is almost unheard of for a country to experience deflation, that is a fall in prices. Low inflation is not considered damaging, however.

But when the rate of inflation becomes high, such as into double digits, it is considered to have a very negative effect on the economy.

It disrupts existing contract arrangements because prices set in the contracts are no longer worth as much as they seemed to be at the time the contracts were signed. This can worsen industrial relations, provoking demands for pay increases and strike action, for example.

High inflation also creates problems for people on fixed incomes, whose real purchasing power is diminished.