What is inflation?
In short
Inflation is how fast prices are rising, on average. When inflation is high, the same pound buys less than it did before.
In plain words
It is not the price of one thing in one shop. It is a measure of many prices across the economy, summed up in a price index. In the UK, the Office for National Statistics publishes consumer price indices. The Consumer Prices Index, or CPI, is the one the Bank of England's 2% target uses. A related index, CPIH, also includes owner-occupiers' housing costs. If the CPI basket costs 3% more than a year ago, CPI inflation is about 3%.
A simple example
Suppose a weekly shop that cost £80 last year now costs £84 for the same items. That is a 5% rise in that particular shop. Your own basket will not match the official one: rent, energy, and food weigh differently for every household. The official rate describes the average, not your receipt.
Why it matters
Rising prices squeeze people whose pay, benefits, or savings do not keep up. They also change the real weight of debts and the return on money in the bank. The Bank of England aims to keep inflation low and stable, around 2% a year, mainly by setting Bank Rate. Very low inflation, or falling prices, can be a problem too if people and firms start delaying purchases.
Easy to mix up
Inflation is the speed of the rise, not the level of prices. If inflation falls from 10% to 3%, prices are still going up, just more slowly. That slowdown is sometimes called disinflation. Deflation means prices falling on average. A single expensive item, such as a holiday or a phone, is not inflation by itself.