Economics AS · The Macroeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Inflation is a sustained rise in the general price level. Deflation is a sustained fall in the general price level, so the inflation rate is negative. Disinflation is a fall in the rate of inflation: prices are still rising, but more slowly.
The price level is measured by the consumer price index (CPI). This is a weighted average of the prices of a basket of goods and services, with weights based on the share of household spending on each item.
Demand-pull inflation comes from AD rising faster than output can rise. Cost-push inflation comes from higher costs of production, which shift SRAS to the left. Real values are money values adjusted for inflation.
Students read a fall in the inflation rate, say from 8% to 5%, as falling prices. Prices are still rising; this is disinflation. Deflation needs a negative inflation rate.
Answer: The CPI is 112.5, so prices have risen by 12.5% since the base year.
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