Essential definitions

Inflation

A sustained increase in the general price level.

Disinflation

A fall in the inflation rate while the general price level continues to rise if inflation remains positive.

Deflation

A sustained decrease in the general price level.

Consumer price index

An index tracking prices of a representative set of consumer goods and services.

Read an index before calculating a rate

Inflation means the general price level rises over time, even if some individual prices fall. A consumer price index, CPI, tracks the price of a representative basket of household purchases. The base period has index 100. An index of 130 means the basket costs 30% more than in the base period.

Annual inflation need not be 30%. Its formula is (current CPI − previous CPI) ÷ previous CPI × 100. Both index values must use a consistent base and the periods being compared must be stated. A move from 125 to 130 gives 4% inflation because the increase of 5 is divided by 125.

Use an unchanged basket

Suppose a basket contains 10 loaves costing 2 each and 5 transport tickets costing 4 each. Its initial cost is 40 currency units. At new prices of 2.20 and 4.40, the same quantities cost 44. The price increase is (44 − 40) ÷ 40 × 100 = 10%. Keeping quantities fixed isolates prices from changes in purchases.

Disinflation means inflation slows, for example from 8% to 3%: prices still rise. Deflation means the general price level falls. Neither is established by one shop cutting one price. These distinctions prevent confusing a lower inflation rate with a return to earlier prices.

Explain measurement limits

Households have different spending patterns. Someone spending heavily on heating may experience a larger cost increase than the average when fuel prices rise. The CPI basket and weights therefore describe a representative pattern, not every person's life.

Quality changes, new products and switching towards cheaper alternatives complicate comparison. A fixed basket can overstate the cost of maintaining similar satisfaction if buyers substitute away from dearer products. Updating methods helps but cannot remove every judgement. Use the CPI alongside household and other price evidence. The HL weighted-index lesson later explains how expenditure shares determine each category's influence.

Apply and evaluate

• A national average can miss differences in household expenditure patterns.
• Frequent updates improve representation but comparisons still depend on statistical methods and quality adjustments.

Real-world application