Inflation
Introduced| English | Meaning |
|---|---|
| inflation/ɪnˈfleɪʃn/ | A sustained increase in the general price level of goods and services. |
| general price level/ˈdʒenərəl praɪs ˈlevl/ | general price level |
| deflation/diːˈfleɪʃn/ | A sustained fall in the general price level of goods and services. |
| weight/weɪt/ | A numerical value expressing the relative importance, cost or contribution assigned to an item or connection. |
| Consumer Price Index/kənˈsuːmə praɪs ˈɪndeks/ | An index tracking changes in the cost of a representative basket of goods and services purchased by consumers. |
| disinflation/ˌdɪsɪnˈfleɪʃn/ | disinflation |
| demand-pull/dɪˈmænd pʊl/ | Describing inflationary pressure caused by aggregate demand increasing relative to the economy's capacity to produce. |
| cost-push/kɒst pʊʃ/ | Describing inflationary pressure caused by rising production costs that reduce aggregate supply. |
| purchasing power/ˈpɜːtʃɪsɪŋ ˈpaʊə/ | The quantity of goods a sum of money can buy. |
| savings/ˈseɪvɪŋz/ | Income not spent on consumption and retained for future use. |
Does a cheaper phone mean a lower cost of living?
- One phone becomes cheaper while food, rent and transport become dearer. A single price cannot show what happened to the cost of a typical household's spending overall.
- Inflation 通货膨胀 is a sustained rise in the general price level 一般物价水平. Deflation 通货紧缩 is a fall in that general level over time. Neither means every price changes by the same amount.
Inflation is:
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Inflation is a sustained rise in the overall price level.
Phone prices fall while the weighted CPI rises. Which statement is correct?
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The index measures the weighted general price level, not a rule for every individual price.
Read the weighted consumer basket
- The Consumer Price Index 消费者价格指数 (CPI), also called the Consumer Prices Index, tracks a basket of goods and services. A weight 权重 reflects the share of household spending: food usually matters more than a rarely bought small item.
- In a simplified basket, food has weight 60% and transport 40%. If their price indices are 110 and 100 on the same base, the basket index is (0.60 × 110) + (0.40 × 100) = 106. Equal weighting would give 105 and ignore the spending pattern. A particular family may face a different price rise from the average basket.
Inflation is commonly measured using the Consumer Price ______.
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The CPI tracks a weighted basket of goods and services; households with different spending can experience different price changes.
In a simplified basket, food has weight 75% and other items 25%. Their indices are 108 and 100, on the same base. What is the overall index?
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0.75 × 108 + 0.25 × 100 = 106. Weights reflect the spending shares.
Divide the change by the earlier index
- Inflation rate = (new CPI − earlier CPI) ÷ earlier CPI × 100%. If the CPI rises from 120 to 126 over a year, inflation is 6 ÷ 120 × 100 = 5%, not 6%. The index change is not automatically the percentage change.
- From 126 to 128.52 in the next year, inflation is 2.52 ÷ 126 × 100 = 2%. Prices are still rising, now more slowly. This is disinflation 通胀放缓. The same basket costs 7.1% more across both years: 128.52 ÷ 120 − 1 = 0.071, not simply 5% + 2%.
The CPI rises from 100 to 105 over a year. What is the inflation rate (%)?
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(105 − 100) / 100 × 100 = 5%.
If inflation falls from 5% to 2%, prices are falling.
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False. Prices are still rising, only more slowly. Prices fall only when inflation is negative (deflation).
The CPI rises from 125 to 130 over a year. What is annual inflation (%)?
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(130 − 125) ÷ 125 × 100 = 4%. The earlier index, not 100 or the new index, is the denominator.
The CPI falls from 150 to 147 over a year. Enter the inflation rate (%), including a minus sign.
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(147 − 150) ÷ 150 × 100 = −2%. The index fell, so this is deflation.
The CPI is 110. Prices rise by 3% over the next year. What is the new CPI?
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110 × 1.03 = 113.3. A smaller positive rate still raises the index.
Explain demand-pull and cost-push causes
- Demand-pull 需求拉动 inflation occurs when total spending grows faster than the economy's ability to supply. For example, higher consumer spending may increase orders; firms near capacity can raise prices. Spare capacity can allow more output instead, so the price effect depends on supply.
- Cost-push 成本推动 inflation follows rising unit production costs, such as more expensive imported fuel or wages rising faster than productivity. Firms may pass costs into prices, but competition can limit this and reduce profits instead. The two causes can operate together.
Identify the initial inflation pressure
Distinguish extra spending from a rise in unit production costs.
Inflation caused by rising wages and raw-material costs is:
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Rising costs push prices up — cost-push inflation.
Compare prices with incomes and saving returns
- Inflation reduces money's purchasing power 购买力. If wages or a pension stay unchanged while prices rise, they buy less. Workers whose pay rises faster than their own living costs may instead gain purchasing power; a higher money wage alone does not prove a real gain.
- Savings 储蓄 do not always lose purchasing power. Compare the interest received with inflation. If a £100 balance earns no interest and the same basket rises from £100 to £105, it no longer buys that basket. Interest above the relevant price rise can preserve or increase buying power; uncertainty still makes planning harder.
A worker’s monthly pay rises from £1000 to £1040. The cost of the worker’s unchanged monthly basket rises from £1000 to £1060. Calculate both percentage increases and assess whether the worker can buy more of that basket.
Compare your own calculation and causal reasoning with the model. A justified judgement depends on the stated conditions and evidence.
A saver earns 6% interest over the year while the relevant basket price rises 4%, with no tax or charges. Which conclusion follows?
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Under the stated conditions, interest exceeds the basket-price rise. Inflation does not imply every saver loses purchasing power.
Consider borrowers, lenders and firms
- With a fixed money repayment, unexpectedly higher inflation can reduce the purchasing power of what a lender receives and the real burden for a borrower. The borrower is not guaranteed to gain: income may fail to rise or a variable interest rate may increase repayments.
- Firms may face higher input costs, repeated price-changing costs and uncertain future demand. If domestic prices rise faster than overseas competitors' and exchange rates do not offset it, exports may become less competitive. Effects depend on costs, selling prices and the ability to adjust.
A borrower must repay a fixed £10000 in a year. Inflation unexpectedly rises. Explain why the real burden might fall, and why the borrower is not guaranteed to become better off.
Compare your own calculation and causal reasoning with the model. A justified judgement depends on the stated conditions and evidence.
Distinguish the causes of falling prices
- Demand-led deflation can follow falling spending: firms sell less, cut output and may reduce jobs. If buyers expect further price falls, some postpone purchases, weakening demand again. Fixed debts become harder to repay if money incomes fall.
- Lower prices caused by better productivity or cheaper inputs can accompany rising output and benefit consumers. Falling prices are not automatically worse than inflation; judge the cause, effects on incomes and jobs, and whether lower costs reach customers.
Country A’s prices fall after households cut spending and firms reduce output. Country B’s prices fall after new technology lowers unit costs while output rises. Explain why the same negative inflation rate need not have the same consequences.
Compare your own calculation and causal reasoning with the model. A justified judgement depends on the stated conditions and evidence.
Choose a response with a trade-off
- Higher interest rates, higher taxes or lower government spending can reduce demand-pull inflation by slowing spending. They work with a delay and may reduce output and jobs. A policy is less effective if spending barely responds.
- For cost-push pressure, productivity improvements, training, better infrastructure or lower input costs may help supply, but take time or public money. Reducing demand does not directly repair a fuel shortage and can worsen unemployment. Choose a response from the diagnosed cause and acknowledge uncertainty.
An economy has unused factories and rising unemployment, but imported fuel costs have sharply increased. A minister proposes a large interest-rate rise to reduce inflation. Explain one possible benefit, one limitation and one alternative response with a limit.
Compare your own calculation and causal reasoning with the model. A justified judgement depends on the stated conditions and evidence.
Use the level, the rate and the affected group
- Use the earlier CPI as the denominator. A smaller positive inflation rate means slower price rises; a falling index means deflation. Weights and household spending patterns affect the measured experience.
- Explain a cause, identify who gains or loses under stated conditions, then judge a policy with an effect and a limitation. Check wages, interest, repayment terms and supply capacity before making a blanket claim.
The CPI rises from 80 to 88. What is the inflation rate? If that rate later falls from 10 percent to 3 percent, are prices falling?
8 divided by 80 is 0.10, which is 10 percent.
Review the same case: CPI rises from 80 to 88, then annual inflation slows to positive 3%. Which statement is correct?
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The index rose by 10 percent. A smaller positive rate is still a rise in prices.