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Level 1: Beginner · Money Basics

Inflation: why prices rise

6 min read · Before you start: Lesson 6 · Updated 31 October 2026

Inflation is the rate at which prices rise over time. Its practical meaning is that the same TT$100 buys less this year than last. It is the quiet force working against every dollar held in cash, and it explains why saving alone is not the whole story.

How it is measured

The Central Statistical Office tracks the prices of a basket of goods and services that a typical household buys, and the change in that basket's cost is the Consumer Price Index. Inflation is the percentage change in that index over a period, usually twelve months.

Two refinements matter when reading reports:

• Headline inflation covers everything in the basket.
• Core inflation excludes food and energy, whose prices swing sharply for reasons unrelated to the broader economy. Economists watch core to see the underlying trend.

Your inflation is not the published figure

The index reflects an average household. A household spending a large share on food experiences food inflation more strongly than the headline number suggests. One without a vehicle is less affected by fuel. The published rate describes the economy; the rate a particular household feels depends on what it actually buys.

What it does to savings

TT$10,000 held in cash, with prices rising 4 per cent a year:

• After 5 years it buys what about TT$8,220 buys today.
• After 10 years, about TT$6,760.
• After 20 years, about TT$4,560.

The balance never changed. Its buying power halved. This is the argument for the distinction in lesson 5 between money needed soon, which belongs somewhere reachable regardless of inflation, and money needed in decades, which is usually held differently.

Nominal against real

A nominal figure is the number printed. A real figure subtracts inflation. A savings account paying 2 per cent while inflation runs at 4 per cent has a nominal return of 2 per cent and a real return of about minus 2 per cent. A salary rising 3 per cent while prices rise 5 per cent is a pay rise in nominal terms and a pay cut in real terms.

Why prices rise

• Demand exceeding supply. More money chasing the same goods pushes prices up.
• Costs rising. When inputs, wages, shipping or energy cost more, those costs move into prices.
• Imported inflation. For an economy importing a great deal, price rises abroad and movements in the exchange rate arrive in local prices. Lesson 31 covers the currency side.
• Expectations. When businesses and workers expect prices to rise, they price and bargain accordingly, which helps bring the rise about.

What is done about it

Managing inflation is a central bank's core responsibility. The main instrument is the policy interest rate — in Trinidad and Tobago, the repo rate, which lesson 32 follows in detail. Raising it makes borrowing dearer and saving more attractive, which tends to slow spending and ease price pressure. Lowering it does the reverse.

Living with it

Inflation is not an emergency; it is a condition. The practical responses that follow from it:

1. Budgets drift. A grocery allocation set two years ago no longer buys the same basket, so budgets need revisiting rather than writing once.
2. Long-horizon money held entirely in cash loses ground. This is the reasoning behind lessons 11, 25 and 26 on investing.
3. Fixed income is exposed. A pension or annuity that does not rise with prices buys less each year, which is central to lesson 35 on retirement planning.
4. Borrowing at a fixed rate behaves differently. A fixed repayment becomes easier to meet in real terms as incomes rise with prices, which is one reason long fixed-rate borrowing and inflation interact.

Run your own figures with the savings growth calculator on the tools page.

Test yourself

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Not financial advice. This lesson is general education only. See our editorial policy and disclaimer.