Definitions & Measurement | Economics for GCSE/IGCSE - Year 11 PDF Download

Inflation & Deflation

• Inflation signifies a sustained rise in the overall price level of goods and services within an economy.
  • The general price level is gauged by monitoring prices of a 'basket' of goods and services typically purchased by an average household each month.
  • This assortment is converted into an index known as the Consumer Price Index (CPI).
  • The UK maintains an inflation target of 2% annually.
  • Low inflation is preferable to no inflation, as it serves as an indicator of economic growth.
• Deflation arises when there is a decline in the overall price level of goods and services within an economy.
  • Deflation occurs only when the percentage change in prices drops below zero percent.

Using the Consumer Price Index (CPI) to Measure Inflation & Deflation

• Inflation is the continuous rise in the overall price level of goods and services within an economy.
• The inflation rate signifies the fluctuations in general price levels over a specific period. It is typically calculated using an index with 100 designated as the base year.
• For example, if the index is 100 in year 1 and 107 in year 2, the inflation rate is 7% (107 - 100 = 7%).
• The Consumer Price Index (CPI) acts as a tool to gauge inflation trends and variations in price levels over time.
• A 'household basket' comprises 700 goods and services that an average family typically buys annually.
• Every year, a household expenditure survey is conducted to ascertain the basket's contents, with items being added or removed as spending patterns change.
• The goods and services in the basket are assigned weights based on how much households typically spend on them. For instance, food, being a higher expenditure, has a greater weight than shoes.
• On a monthly basis, prices of these items are collected from various locations nationwide, and their averages are calculated.
• The price of each item is multiplied by its weight to determine its contribution to the overall basket price.
• By summing up these values, the total cost of the 'basket' is computed.
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• The inflation rate between two periods is derived from the percentage difference in CPI values for those periods.