Inflation & Deflation
- Inflation is the sustained increase in the general price level of goods/services in an economy
- The general price level is measured by checking the prices of a 'basket' of goods/services that an average household will purchase each month
- This basket of goods is turned into an index and it is called the consumer price index (CPI)
- The UK has an inflation target of 2% per annum
- Low inflation is better than no inflation as it is a sign of economic growth
- Low inflation is better than no inflation as it is a sign of economic growth
- Deflation occurs when there is a fall in the general price level of goods/services in an economy
- Deflation only occurs when the percentage change in prices falls below zero %
Exam Tip
Remember that a reduction in the inflation rate from e.g. 5% to 3% means that prices are still rising but rising more slowly (inflation at a decreasing rate is called disinflation)
MCQ will check your understanding of decreasing inflation by asking you questions such as:
In which year are prices their highest?
Y1 Inflation = 5%
Y2 inflation = 3%
Y3 inflation = 1%
Y3 is the answer. Prices are 9% higher in Y3 than at the start of Y1 (5% + 3% + 1%)