Inflation | A-Level Economics Notes

These revision notes cover everything you need to know about Inflation for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

How is inflation measured?

Inflation is measured using the CPI (Consumer Price Index)

It tracks the prices of a weighted basket of goods and services in the UK.

What is inflation?

A rise in the average price level.

What is deflation?

A fall in the average price level.

What is disinflation?

When the rate of inflation slows down (but remains positive) e.g. from 5% to 2%

The two causes of inflation

1. Demand pull inflation (AD shifting right)
2. Cost push inflation (AS shifting left)

The impact of high inflation

1. inflation is a rise in average price level
2. if we assume that wages do not rise at the same rate as prices
3. consumers have less disposable income
4. living standards fall
5. workers ask for a pay rise
6. firms are likely offer the higher wages and then raise prices further, causing a wage-price spiral
7. however, firms could also choose to layoff workers, causing unemployment to increase.

The impact of deflation

1. deflation is when there is a fall in the average price level
2. this means that consumers form an expectation that prices will continue to fall.
3. this means that consumers are likely to delay spending.
4. for example, consumers would rather buy a house later as prices are expected to fall even further.
5. this means that there is a decrease of demand for goods and services.
6. labour is a form of derived demand so firms would layoff workers as they expect to produce less output
7. this means that income and consumer confidence would fall even further, and this could cause a deflationary spiral.

Summary questions

1. How is inflation measured?
2. What is inflation?
3. What is deflation?
4. What is disinflation?
5. The two causes of inflation
6. Why is the inflation target is 2%?
   1. What is the impact of high inflation?
   2. What is the impact of deflation?

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