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Inflation is an on-going rise in prices, as measured by the change in price of a so called "basket of goods". Generally inflation figures are given on a yearly basis.

If a loaf of bread costs $2 (on average) one year and $4 (on average) the next, the the rate of inflation for bread in that particular year is 100%.

Inflation doesn't usually effect all products in exactly the same way. For example, bread may have risen by 100% in the year in question but the price of milk may have risen by just 1%.

Calculating Inflation

So, how does one calculate the global inflation rate (for a particular country)? One way (there are others) is to to look a a typical "shopping basket" and measure that average prices difference over the year. If the cost of the typical shopping basket is €100 one year and €101 the next, the inflation rate is 1%.

Inflation and your finances

Inflation is, in fact, an important consideration for your personal finances. Here are few points to remember:

• If an economy is experiencing inflation, any cash you have, will be worth less the next year. Imagine a situation where inflation is running at 100%. If you have £100 in your back pocket, which you then forget about for a year, it will be worth just £50 when you finally remember you put it there!
  
  
• If an economy is experiencing inflation, any borrowings you have, will be less difficult to pay off a year later. Imagine the same situation where inflation is running at 100%. If borrow £100 from a friend, and only pay him back a year later, he will only be able to buy half of what he could when he lent you the money!

Inflation Quotes

"Inflation is taxation without legislation" - Milton Friedman

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” - Ronald Regan