An Introduction to Inflation
- Inflation is the sustained increase in the average price level of goods/services in an economy
- Deflation occurs when there is a fall in the average price level of goods/services in an economy
- Deflation only occurs when the percentage change in prices falls below zero %
- Deflation only occurs when the percentage change in prices falls below zero %
- Disinflation occurs when the average price level is still rising, but at a lower rate than before
- These figures demonstrate disinflation: Y1 = 5% Y2 = 4% Y3 = 2%
- Inflation is increasing but at a decreasing rate
- These figures demonstrate disinflation: Y1 = 5% Y2 = 4% Y3 = 2%
Worked example
How would you characterise the fall in the CPI from 2018 to 2021? Explain your answer [3]
Step 1: Study the time period and decide if you are witnessing inflation, disinflation or deflation
Disinflation (1 mark)
Step 2: Explain your answer
According to the CPI data, prices are still rising but at a decreasing rate. For example, in 2018 prices were rising at around 3%. In 2019 this increase fell to roughly 1.8%. In 2021, they were still rising but by a much lower 0.5%
(2 marks for an answer with a correct explanation which references the data)