Inflation and purchasing power
The price index and the inflation rate, disinflation, deflation and stagflation, the causes of inflation, purchasing power, the real interest rate and who gains or loses when prices rise.
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Inflation: what is it?
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A general and sustained rise in the level of prices, which lowers the quantity of goods that a unit of money can buy.
One good's price is not enough: inflation means prices as a whole are rising, which the consumer price index measures.
The inflation rate goes from 5.2% to 2.4% in a year. What has happened?
- Disinflation: prices still rise, more slowly
- Deflation: the price level has fallen
- Disinflation: prices are falling, but more slowly
- Deflation: prices are rising more slowly
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Disinflation: prices still rise, more slowly
A still-positive inflation rate means prices are still rising. Only a negative rate would be deflation.
The purchasing power of an income rises if the income grows … than prices.
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The purchasing power of an income rises if the income grows faster than prices.
A 2% pay rise with 5% inflation is a loss of purchasing power. The change in income is always compared with the change in prices.