An overall price increase
In a market economy, the prices of goods and services vary. Some increase, others decrease. We speak of inflation when prices increase overall, and not just the prices of a few goods and services. When this is the case, over time, each euro or US dollar or any currency backed by the local government makes it possible to buy fewer products. In other words, inflation gradually erodes the value of money.
Changes in some prices matter more than others
To calculate the average price increase, we give more weight to the prices of products representing a large part of our expenditure, such as electricity, than to those of products on which we spend less, such as sugar or postage stamps. .
Not everyone buys the same thing
Each household has different consumption habits: some own a car and eat meat, others only travel by public transport or are vegetarians. It is the average expenditure of all households that determines the weight of the various goods and services in the measurement of inflation.
This measure of inflation takes into account all goods and services consumed by households, including:
- everyday goods (such as groceries, newspapers or gasoline)
- durable goods (clothing, computers, washing machines, etc.)
- services (hairdressing salons, insurance or rent)
All the goods and services consumed by households during the year in question are represented by a “basket”. Each good or service in this basket has a price, which may vary over time. Every country has its own basket and include or exclude certain goods and services from the basket it self, the ratio or ponderation of each product included in theses baskets depends on the organization issuing the index. The annual inflation rate is obtained by comparing the total price of the basket during a given month with that recorded for the same month of the previous year.
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