Macroeconomic objectives: Inflation

Inflation

Sustained increase in the average price level in an economy over time.

Deflation

Sustained decrease in the average price level in an economy over time.

Disinflation

When the average price level is increasing but at a slower rate.

Consumer Price Index

A weighted index that measures the changes in prices of a ‘basket goods and services‘ consumed by the average household.

CPI formula

Cost of basket in year x / Cost of basket in base year * 100

Demand pull inflation

Caused by excess demand in the economy.

Cost push inflation

Caused by the increase in the costs of production in an economy.

Demand-side deflation

Caused by a fall in total aggregate demand in the economy.

Supply-side deflation

Caused by increase in the productive capacity of the economy.