4.8 Inflation and Deflation

2026 Syllabus Objectives

By the end of this topic, you should be able to:

  • 4.8.1 Define inflation and deflation
  • 4.8.2 Explain how inflation and deflation are measured using the Consumer Prices Index (CPI)
  • 4.8.3 Identify and explain the causes of inflation (demand-pull and cost-push) and deflation (demand-side and supply-side)
  • 4.8.4 Analyse the consequences of inflation and deflation for consumers, workers, savers, lenders, firms, and the economy as a whole
  • 4.8.5 Evaluate the policies available to control inflation and deflation, and how effective they might be

4.8.1 — Definitions

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What is Inflation?

Inflation is a persistent (ongoing, not just a one-time) rise in the general level of prices of goods and services in an economy over time.

  • "General price level" means the average price of everything in the economy — not just one product going up, but prices rising broadly.
  • When inflation happens, the value of money falls. This means each unit of money (e.g. $1) buys you less than it used to.
  • Governments want to keep inflation low and stable — typically around 2% per year — because a small amount of inflation is a sign of a healthy, growing economy.

Types of Inflation by Rate

TypeRate of InflationDescription
Mild inflation~5–10%Prices rise steadily; manageable
Galloping inflation~10–20%Prices rise quickly; damaging
Hyperinflation50%+Prices rise so fast that money becomes almost worthless; the economy can collapse

What is Deflation?

Deflation is a persistent fall in the general price level of goods and services. It is essentially the opposite of inflation — a negative inflation rate. For example, if inflation goes below 0%, deflation is occurring.

⚠️ Don't confuse these three terms:

  • Inflation — prices are rising
  • Deflation — prices are falling (inflation rate below 0%)
  • Disinflation — prices are still rising, but more slowly than before (e.g. inflation falls from 8% to 4%)

Disinflation is important: it does not mean prices are falling — it just means they are rising at a slower rate. Think of a car slowing down but still moving forward.

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