Every month, a single number tells us how fast prices are rising: the inflation rate. It moves markets, shapes interest rates and appears in every news bulletin. And yet many people feel it does not match their own experience at all. Their rent, food and energy bills seem to be rising much faster. Both things can be true. Here is why.
A very large shopping basket
Inflation is measured using a price index. Statisticians choose a very large imaginary shopping basket that represents what an average household buys in a year: food, rent, fuel, clothes, haircuts, phone bills, cinema tickets and hundreds of other items. Every month, they check the prices of all those items, in many shops and cities, and calculate how much the whole basket costs.
The inflation rate is simply how much more the basket costs than it did a year ago. If the basket cost $1,000 last year and costs $1,030 today, inflation is 3%.
Inflation is an average. Nobody lives an average life.
Daniel Okafor
