Price stability
Introduced| English | Meaning |
|---|---|
| inflation/ɪnˈfleɪʃn/ | A sustained increase in the general price level of goods and services. |
| Consumer Price Index/kənˈsuːmə praɪs ˈɪndeks/ | An index tracking changes in the cost of a representative basket of goods and services purchased by consumers. |
| 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. |
| deflation/diːˈfleɪʃn/ | A sustained fall in the general price level of goods and services. |
| disinflation/ˌdɪsɪnˈfleɪʃn/ | A reduction in the rate at which the general price level is rising. |
When money loses its value
- A loaf cost a few pennies a century ago. The slow, relentless rise in prices is inflation 通货膨胀 — and controlling it is a central bank's main job.
- Too much is damaging; so, surprisingly, is falling prices.
The CPI rises from 100 to 103 over a year. What is the inflation rate (%)?
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(3 / 100) × 100 = 3%.
Measuring inflation
- Inflation is a sustained rise in the general price level; the rate is measured by the Consumer Price Index 消费者价格指数 (CPI) — the price of a representative "basket" of goods.
Worked example. The CPI rises from 100 to 103 over a year. Inflation = (3 ÷ 100) × 100 = 3%.
Inflation is measured from the price of a basket of everyday goods like these
Aggregate demand and supply
The overall price level sits where aggregate demand meets aggregate supply — a shock to either moves prices and output.
Inflation caused by excess aggregate demand is called:
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Demand-pull: too much demand chasing too few goods.
Match each inflation type to its cause.
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Demand-pull is demand-side; cost-push is supply-side (costs).
Demand-pull 需求拉动 vs cost-push 成本推动
- Demand-pull: too much AD chasing too few goods ("too much money chasing too few goods").
- Cost-push: rising costs (wages, raw materials, import prices) push prices up even without extra demand.
Deflation means the general price level is actually falling.
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Deflation = negative inflation; disinflation is just a slowing of positive inflation.
Central banks usually target low, stable, positive inflation of around ______ percent.
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A common target is about 2% — low and stable, not zero (to avoid deflation).
Deflation 通货紧缩 and its dangers
- Deflation (falling prices) sounds good but can be worse: people delay spending (waiting for lower prices), debts grow heavier, and the economy can stall.
- Central banks therefore target low, stable, positive inflation (often around 2%).
A falling inflation rate is not deflation. Disinflation 反通货膨胀 = inflation slowing (prices still rising, just slower). Deflation = the price level actually falling (negative inflation).
You've got it
- inflation = sustained rise in the price level, measured by the CPI
- demand-pull (excess AD) vs cost-push (rising costs)
- deflation (falling prices) is dangerous; banks target low, stable, positive inflation (~2%)