Key terms
- Inflation rate
- The inflation rate is the percentage change in the price level from one period to the next.
- Price level
- The price level is a single figure that combines the prices of the many goods and services people buy.
A basket counts each price by how much people spend on it
To measure the price level, start with a basket of the goods and services people typically buy. A plain average of prices would mislead, because some items matter more than others: a 10 per cent rise in rent hurts most households far more than a 10 per cent rise in the price of carrots. So each price is weighted by the quantity people actually buy, and the cost of the basket is turned into an index set to 100 in the base year.