a sustained rise in the general price level. It is about prices in general, rising over time.

Which would cause cost-push inflation?

a sharp rise in the price of oil. Oil is a cost for almost every firm, and they pass it on. The others raise demand.

Who is most likely to gain from unexpected inflation?

borrowers. The money they repay is worth less than the money they borrowed.

The inflation rate falls from 6% to 4%. What is happening to prices?

They are rising more slowly. A positive rate means prices are still going up.

Inflation and deflation · Edexcel IGCSE Economics revision

In plain words

If a loaf cost $1 a few years ago and costs $1.50 now, each dollar buys less bread than it did. When prices in general keep rising like this, that is inflation, and the value of money is falling.

A little is normal. A lot is harmful, and so is the opposite, prices that keep falling.

5 things to know

Inflation is a sustained rise in the general price level. Deflation is a sustained fall in the general price level.
It is measured with the Consumer Prices Index (CPI): the cost of a "basket" of goods and services that a typical household buys, with each item weighted by how much is spent on it. The inflation rate is the percentage change in the CPI.
Demand-pull inflation: total demand grows faster than the economy can supply. Cost-push inflation: rising costs, such as wages, oil or imported materials, are passed on in higher prices.
Who loses: savers, if interest is below inflation; lenders; people on fixed incomes. Who gains: borrowers, because the real value of what they owe falls.
Other costs: exports become less competitive, firms face the cost of changing their prices (menu costs), people spend time shopping around (shoe-leather costs), and uncertainty puts firms off investing.

Worked example

The CPI rises from 120 to 126 over a year. Calculate the rate of inflation.

Change in the index = 126 − 120 = 6.
Inflation rate = change ÷ original × 100 = 6 ÷ 120 × 100.
The inflation rate is 5%.

Tips and tricks

If the inflation rate falls from 5% to 3%, prices are still rising, only more slowly. Prices fall only when the rate is negative: that is deflation.
To decide who gains and who loses, ask what happens to the real value of the money they hold or owe.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Inflation and deflation: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Inflation is
- a rise in the price of one product
- a sustained rise in the general price level (the answer)
- a fall in the value of exports
- a rise in real GDP
It is about prices in general, rising over time.
The CPI rises from 200 to 210. What is the inflation rate?
- 2%
- 5% (the answer)
- 10%
- 210%
10 ÷ 200 × 100 = 5%.
Which would cause cost-push inflation?
- a cut in income tax
- a rise in consumer spending
- a sharp rise in the price of oil (the answer)
- a fall in interest rates
Oil is a cost for almost every firm, and they pass it on. The others raise demand.
Who is most likely to gain from unexpected inflation?
- savers
- lenders
- borrowers (the answer)
- pensioners on a fixed income
The money they repay is worth less than the money they borrowed.
The inflation rate falls from 6% to 4%. What is happening to prices?
- They are falling.
- They are rising more slowly. (the answer)
- They are not changing.
- They are rising faster.
A positive rate means prices are still going up.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

4 questions, 10 marks. Write your answers on paper, then check them.

Inflation and deflation

Edexcel International GCSE Economics 4EC1 · 10 marks · papermunch.org

Name ______________________________ Date ______________

Define inflation.[2]
Show answerHide answer
A sustained rise in the general level of prices in an economy.
I got this one
The CPI was 150 last year and is 153 this year. Calculate the inflation rate.[2]
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2%. 3 ÷ 150 × 100.
I got this one
Explain the difference between demand-pull and cost-push inflation.[3]
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Demand-pull inflation is caused by total demand rising faster than total supply, which pulls prices up. Cost-push inflation is caused by rising costs of production, which firms pass on to consumers as higher prices.
I got this one
Explain why inflation harms people who have savings.[3]
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The money they have saved buys less as prices rise. If the interest they earn is lower than the rate of inflation, the real value of their savings falls.
I got this one

Answers: Inflation and deflation

1. A sustained rise in the general level of prices in an economy.
2. 2%. 3 ÷ 150 × 100.
3. Demand-pull inflation is caused by total demand rising faster than total supply, which pulls prices up. Cost-push inflation is caused by rising costs of production, which firms pass on to consumers as higher prices.
4. The money they have saved buys less as prices rise. If the interest they earn is lower than the rate of inflation, the real value of their savings falls.