What causes inflation?

Inflation happens for two broad reasons, and in practice they usually happen together.

Demand running ahead of supply

The first is demand-pull. People want to buy more than the economy can currently produce, and when more money chases the same goods, sellers raise prices because they can. Stimulus, cheap credit and a hot labour market all push in this direction.

The cost of production rising

The second is cost-push. Wages, energy or shipping get more expensive, and firms pass those costs to customers to protect their margins. An oil price spike is the textbook case: it raises the cost of making and moving almost everything, so it shows up far beyond the fuel pump.

Why that distinction matters

It matters because central banks can really only act on one of them.

Raising interest rates cools demand. It makes borrowing more expensive, slows hiring and investment, and takes heat out of the demand side. Against demand-pull inflation, that is the right tool.

Against a supply shock it does very little. Raising rates does not produce more oil or unblock a port. This is why central bankers often say they will “look through” a supply-driven price rise, and why they get uncomfortable when one lasts long enough to feed into wage expectations. Our central bank rates page shows where five major banks currently sit.

The headline number describes almost nobody

The published inflation rate is an average across a basket of goods and services, and almost nobody buys that exact basket. Your own rate depends on where your money actually goes.

The spread between categories is much wider than most people assume. In the year to June 2026, US headline CPI ran 3.53%, while the nine major expenditure groups ranged from energy at 15.70% down to education and communication at -0.06%. That is a gap of nearly 16 percentage points inside one “inflation rate”.

So someone with a long commute and a rented flat is living in a genuinely different inflation environment from someone who works at home and owns outright, in the same month and the same city. Neither is misreading the data. The average simply is not about either of them.

Our inflation by category page breaks the current print into all nine groups, and the personal inflation tracker weights those same official categories by what you actually spend.

What inflation is not

Two things worth separating out.

Falling inflation is not falling prices. If inflation drops from 6% to 3%, prices are still rising, just more slowly. Prices only fall in aggregate during deflation, which is rare and generally worse.

And a price rise in one thing is not inflation. Inflation is a broad, sustained rise in the general price level. Your insurance premium jumping is a price change; it becomes inflation when it happens across enough of the economy for long enough.