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Inflation and deflation
Inflation is a sustained increase in the general price level. Moderate inflation is a policy target; hyperinflation destroys money's store of value.
Need to know
What you need to know
- Price stability is a macroeconomic objective referring to a low and stable rate of positive inflation, typically around 2%.
- It avoids the dangers of deflation while allowing for economic flexibility.
- The Consumer Prices Index (CPI) is the headline measure of inflation.
- The CPI tracks a weighted basket of goods and services to reflect average household spending patterns.
Explanation
Rising prices economy-wide
- CPI tracks basket of goods — inflation rate = ((CPI₁ − CPI₀)/CPI₀) × 100%.
- Demand-pull: AD shifts right — 'too much money chasing too few goods'.
- Cost-push: SRAS shifts left — oil shock, wage push, import costs.
- Deflation: falling P — may increase real debt burden and delay spending.