Well, technically, what matters is body fat percentage. Generally, inches wil correlate, to some extent, with body fat percentage, but it is possible to lose inches while not losing as much body fat as your inch-loss would indicate, and indeed it is possible to lose inches while losing more body fat than your inch-loss would indicate. It's a rough estimate.
Remarkably, I've found weight correlates to body fat percentage just about as well as inches, for most of the people I've known going through weight-loss. The reason for this is that gaining muscle mass is a very slow process -- as a man I can
dream of gaining a pound of muscle a month... maybe someday I'll achieve that rate, but it isn't assured. Women almost can be guaranteed to gain muscle mass slower than that, unless they're taking steroids (or testosterone

). So in the end, significant (more than a pound or so) short-term weight-gain (or lack of anticipated weight-loss) almost always translates to fat gain or water gain, not muscle gain.