Ask your grandparents what a chocolate bar cost when they were your age. The number sounds tiny — perhaps a few pence. The bar has not got bigger; the pound has got weaker. That slow rise in prices is inflation.
Purchasing power
- Purchasing power is how much your money can actually buy.
- When inflation is 3%, something that cost £100 last year costs about £103 this year — so £100 now buys less than it did.
- The UK measures inflation with the CPI (Consumer Prices Index), based on a "basket" of everyday goods.
Same money, fewer sweets
| This year | After a 25% price rise | |
|---|---|---|
| Price per sweet | 50p | 62.5p |
| Sweets for £10 | 20 | 16 |
Your £10 note is unchanged, but it now buys four fewer sweets. That is inflation eating your purchasing power. Notice too that inflation compounds year on year: a 3% rise each year does not simply add up to 15% over five years, because each year's rise is applied on top of the last, which is why a £100 basket reaches nearly £116 rather than exactly £115.
Beating inflation
- Money in a jar loses value every year prices rise.
- Halal investment growth fights back — but only if it beats inflation.
- Investing (shares, funds) has historically grown faster than inflation over long periods, though value can go down as well as up. This is education, not financial advice.
Deflation
Deflation is the opposite: prices fall over time. It sounds nice, but if people expect goods to be cheaper next month they put off buying, shops sell less, and businesses may cut jobs. That is why the Bank of England aims for low, steady inflation of around 2% rather than zero — a gentle, predictable rise keeps the economy moving without eating savings too quickly. When inflation climbs much higher, the Bank often raises interest rates to cool spending back down, which is why the two are always in the news together.