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When the everyday "Cost of Living" increases, our dollars don't go as far as they used to.  Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket".  If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000. 

Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't.  For example, over the past year:

• Gasoline: +26%
• Milk: +13.3%
• Children's Shoes: +4.6%
• Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance.  Inflation is linked to high mortgage rates. 

This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

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