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Inflation and how it is measured
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Inflation means prices rising across the economy. Governments aim for low and stable inflation.
Inflation and deflation
Inflation is a sustained rise in the general price level.
Deflation is a sustained fall in the general price level.
Many governments target low and stable inflation; for example the Bank of England's target is 2% CPI inflation.
Deflation is a sustained fall in the general price level.
Many governments target low and stable inflation; for example the Bank of England's target is 2% CPI inflation.
Measuring inflation: CPI
The Consumer Prices Index (CPI) tracks the prices of a basket of goods and services bought by typical households.
Items are weighted by how much households spend on them.
A base year is given an index of 100.
Inflation rate (%) = (index this year − index last year) ÷ index last year × 100
Items are weighted by how much households spend on them.
A base year is given an index of 100.
Inflation rate (%) = (index this year − index last year) ÷ index last year × 100
Causes
Demand-pull inflation: total demand grows faster than the economy can supply, pulling prices up. Often in a boom.
Cost-push inflation: rising production costs (wages, oil, imported materials) push prices up.
Interest rates: central banks usually raise interest rates to reduce inflation, because higher rates cut borrowing and spending.
Cost-push inflation: rising production costs (wages, oil, imported materials) push prices up.
Interest rates: central banks usually raise interest rates to reduce inflation, because higher rates cut borrowing and spending.
The CPI rises from 120 to 126. What is the inflation rate?
- Change = 6
- 6 ÷ 120 × 100
Answer: 5%
Inflation is a sustained rise in the general price level; deflation is a fall. CPI uses a weighted basket of goods. Demand-pull comes from too much demand; cost-push from rising costs. Higher interest rates reduce inflation.
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