Inflation: why prices rise

Maja, a pensioner in Maribor, has noticed that her electricity bill and her weekly shopping cost more than last year. Her pension went up 3% this year. Over the same time, prices in Slovenia rose 3.3%. So is Maja better off, or worse off? To answer, you need to understand inflation.

Inflation means the average price is rising

Inflation is a general rise in prices over time. It is usually given as a percentage per year. It is not about one product getting more expensive. It is the average across everything a typical household buys.

When prices rise, each euro buys a little less. How much your money can buy is called its purchasing power. At 3% inflation, €100 a year from now buys what 100 ÷ 1.03 = €97.09 buys today. At a steady 2% for 10 years, it buys what about €82 buys today.

The opposite, a general fall in prices, is called deflation. It sounds pleasant, but it can be harmful. People delay purchases because things will be cheaper later, so shops and firms sell less. Debts fixed in euros also become harder to repay. Japan lived with falling or flat prices for many years.

When inflation drops, for example from 5% to 3%, prices usually do not fall. They only rise more slowly.

How inflation is measured

Every month, statisticians record the prices of thousands of goods and services: bread, rent, fuel, phones, haircuts and more. Each price gets a weight: the share of household spending that goes on it. The weighted average change is the inflation rate.

Most countries publish a CPI (consumer price index). EU countries also publish the HICP, the harmonised index, which follows the same rules in every EU country so that they can be compared. The HICP counts all household spending inside the country, including spending by foreign visitors. The ECB uses it for its target. In Slovenia, the statistics office SURS publishes both. In September 2026 the national CPI rose 3.3% and the HICP 3.7%: same prices, different weights.

Your own inflation can differ from the official one. Someone who drives a lot feels fuel prices more; someone who rents feels rent rises more.

Why prices rise, and why the target is 2%

Inflation has four main causes:

• Demand-pull: people and firms want to spend more than the economy can produce.
• Cost-push: costs jump, for example energy. In 2026, conflict in the Middle East pushed up oil and gas prices. In September 2026, euro area energy prices were 18.8% higher than a year earlier.
• Money growth: over long periods, very high inflation always comes with money being created much faster than the economy grows.
• Expectations: if everyone expects 5%, workers ask for more and firms raise prices, so the 5% tends to arrive.

The ECB aims for 2% over the medium term, and treats being above or below it as equally unwelcome. In 2026 it raised its interest rates in June and September to stop the energy shock from spreading to wages and other prices. Why not aim for 0%? A small positive rate keeps a safety margin above deflation. It leaves room to cut interest rates in a downturn. It also allows for price indices slightly overstating inflation, for example when products improve in quality.

Real and nominal

A nominal amount is the number of euros as written. A real amount is adjusted for inflation: it measures what those euros can buy. A quick rule:

real change ≈ nominal change − inflation

Maja’s pension rose 3% while prices rose 3.3%. Her real pension changed by about 3 − 3.3 = −0.3%. She has more euros, but they buy slightly less. To keep up, her €800 pension would need to become 800 × 1.033 = €826.40, not €824.