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)
| Year | Cost of the basket (€) | CPI (2023 = 100) | Inflation rate |
|---|---|---|---|
| 2023 | 200 | 100 | – |
| 2024 | 210 | 105 | 5% |
| 2025 | 214.20 | 107.1 | 2% |
The points to remember
- CPI = cost of the basket ÷ cost in the base year × 100: 210 ÷ 200 × 100 = 105.
- Inflation rate = (new CPI − old) ÷ old × 100: (107.1 − 105) ÷ 105 × 100 = 2%.
- 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 2 asked this in May 2022: two inflation rates for 2 marks, then the disinflation year for 1.
Our example (made-up numbers)
| Year | Cost of the basket (€) | CPI (2023 = 100) | Inflation rate |
|---|---|---|---|
| 2023 | 200 | 100 | – |
| 2024 | 210 | 105 | 5% |
| 2025 | 214.20 | 107.1 | 2% |
Using the table: (i) calculate the inflation rate for 2024 and 2025 [2]; (ii) identify the year in which disinflation began [1].
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 3 marks are given
| You write | Marks |
|---|---|
| Each year's rate: (new − old) ÷ old × 100 | 1 each |
| The disinflation year: inflation falls but stays positive (your own figures followed through) | 1 |