how does inflation work?
I know that inflation is value of money changing but let's say that the value of 1 pound decreased to 95p. Does that mean if I pay for an item that cost 1 pound with my 1 pound coin (value of 95p now) does that mean I will have to add an additional 5 pence as well?
Original post by DRIPDRIP9463
I know that inflation is value of money changing but let's say that the value of 1 pound decreased to 95p. Does that mean if I pay for an item that cost 1 pound with my 1 pound coin (value of 95p now) does that mean I will have to add an additional 5 pence as well?
Yes. The impact of inflation is that things become more expensive. So the item you previously paid £1.00 for would now cost £1.05 (using your numbers).
Original post by DRIPDRIP9463
I know that inflation is value of money changing but let's say that the value of 1 pound decreased to 95p. Does that mean if I pay for an item that cost 1 pound with my 1 pound coin (value of 95p now) does that mean I will have to add an additional 5 pence as well?
Inflation is a pretty complex subject. All this information is as far as I know, and I am in no way an expert but:
The rate of inflation is calculated based on the current price of different items (bread, milk, bus fare, car etc.) which is then compared with historical data. These prices are known as CPI (Consumer Prices Index).
Inflation is always present. The average for the UK is around 2% (we're at a huge peak of over 10%).
This means that every year the cost of the items included in the CPI rises by 2% - eg. something costs £1, the next year it will cost £1.02, the next year £1.04 etc. In reality it isn't exactly this linear but this is the idea. Therefore, with inflation at 10% everything is increasing by 10% - something cost £1 before, now costs £1.10.
It's the job of the Bank of England to regulate inflation through regulating interest rates (you might have heard about this in terms of mortgage repayments) - the idea behind this is it will discourage people to take loans, which means they will spend less money which will decelerate the rise of inflation.
However, inflation can be influenced though a broad range of factors. For example, foreign trade or wholesale energy prices (part of the cost of living crisis).
The idea is that people having and thus spending loads of money means that the value of that money depreciates.
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