Inflation is a sustained rise in the general price level.
Three words to keep apart
Inflation
Prices rise on average.
Disinflation
Prices still rise, but more slowly.
Deflation
Prices fall on average.
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Inflation is measured with a consumer price index (CPI): the cost of a typical basket of goods, weighted by what households spend.
Our example (made-up numbers)
| Item | Weight | Price index 2025 (2024 = 100) | Weight × index |
|---|---|---|---|
| Food | 0.4 | 110 | 44 |
| Housing | 0.35 | 104 | 36.4 |
| Transport | 0.25 | 96 | 24 |
| Weighted index | 1.0 | 104.4 |
The points to remember
- Weighted index = Σ (weight × price index): 44 + 36.4 + 24 = 104.4: 4.4% inflation.
- Inflation rate = (new CPI − old) ÷ old × 100, always divided by the old value.
- If prices rise faster than incomes, purchasing power falls.
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The CPI is an average. That is its strength and its weakness.
Why the CPI is not perfect
The average household
Pensioners, students and families buy different things: their own inflation differs.
Quality changes
A phone that costs more but does much more is counted as a price rise.
New products
New goods take time to enter the basket.
Substitution and weights
People switch to cheaper goods; the weights change only slowly.
Remember it as: Average basket, average household: no one's exact inflation.
Paper 3 asks this chain almost every year: November 2023 and May 2025.
Our example (made-up numbers)
| 2024 | 2025 | 2026 | |
|---|---|---|---|
| Cost of the basket (€ per week) | 180 | 189 | ? |
| CPI (2024 = 100) | 100 | ? | 107.1 |
Using the table: (i) calculate the CPI for 2025 [1]; (ii) the cost of the basket in 2026 [1]; (iii) the rate of inflation in 2025 and 2026 [2].
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the Paper 3 marks are given
| You write | Marks |
|---|---|
| The basket cost or the weighted index | 1-2 |
| CPI = cost this year ÷ cost in the base year × 100 | 1 |
| Each year's inflation rate (working not required; own figures followed through) | 1 each |