Where is all your money going?

The official inflation numbers don't currently match the rate you experience - at the grocery store, the hospital, the child's school. Why does this happen, and how bad is it? What can you do to safeguard against the erosion of earnings, savings and household budgets? Kashyap Kompella explores personal inflation

- Kashyap Kompella

We are all feeling the slow boil.

Inflation is one of modern life's inevitabilities, as certain as death and taxes. Prices rise, currencies thin, and what once bought a quick midday sandwich is now barely enough for just the bread.

This eats quietly through every wallet: rich, poor and those in-between.

The poor feel it first and hardest; every rise in prices chips away at necessities, not choices. The middle-class watch savings shrink. The affluent can hold out longer and smile through the squeeze, but eventually everyone feels the erosion, not just of wealth, but of certainty.

Salt in the system

A little inflation is considered healthy because it signals that demand is alive, and production is expanding. As the economist John Maynard Keynes put it, mild inflation reflects an economy realising its potential. It is a component in the engine of growth.

Companies can continue to inch prices upward because people are steadily earning, spending and investing more.

Zero inflation, by contrast, points to stagnation: weak demand, falling profits, idle capacity. When prices don’t move, neither do wages; new ideas do not reach fruition.

Economists such as Keynes and James Tobin argued that modest inflation greases the wheels of the labour market. It lets real wages adjust without outright pay cuts, keeping employment stable.

For this reason, central banks target inflation rates of up to 4%. That is seen as high enough to encourage borrowing and enterprise, but low enough to preserve trust (in the economy and in money).

A little inflation, then, is like salt in one’s food. Overdone, it can overwhelm the system, adding a bad aftertaste to each meal.

Bills of fare

How is inflation measured?

The government tracks average price rise across different sectors (food, fuel, housing, healthcare, as well as other key goods and services).