Inflation
Inflation
- Inflation = a rise in the average level of prices over time (the opposite is deflation).
- Measured by the Consumer Prices Index (CPI): a "basket" of goods a typical family buys, each good given a weight, tracked each year.
Practice
Inflation is measured using the Consumer Prices Index (CPI), which tracks:
The CPI follows the cost of a basket of typical goods, each given a weight.
Causes & effects
- demand-pull — total demand grows faster than supply, so prices are pulled up.
- cost-push — firms' costs rise (wages, materials), so they raise prices.
- Effects: money loses purchasing power, savings worth less, exports become dearer.
- Deflation can be harmful too: people delay buying → demand falls → unemployment rises.
Practice
Match each cause of inflation.
Demand-pull comes from excess demand; cost-push from rising costs.
Practice
Deflation can be harmful because people delay buying, lowering demand.
If prices are falling, buyers wait for lower prices, so demand falls and unemployment can rise.
You've got it
Key idea
- inflation = rising average prices; measured by CPI (a weighted basket)
- causes: demand-pull (excess demand) and cost-push (rising costs)
- inflation cuts purchasing power; deflation can shrink demand and raise unemployment