- Inflation
- Inflation is a general and ongoing rise in the level of prices across an entire economy, so that each pound buys less over time.
- Relative price change
- A relative price change is a rise or fall in the price of some goods compared with others, such as dearer rail fares alongside cheaper laptops.
Three terms for a price level that departs from steady inflation
Can you name the three terms, other than inflation itself, for how the price level can behave?
Each term describes the inflation rate: the percentage change in the price level over a year.
Disinflation is a fall in the inflation rate that leaves it above zero, so prices keep rising but by less each year than before.
Can you think of an example?
UK inflation falls from 8 per cent to 3 per cent. A £100 basket now costs £103 a year later, not £108: prices still rise, more slowly.
Deflation is a negative inflation rate, so the general price level falls and each pound buys more over time rather than less.
Can you think of an example?
From 1999 to 2002 prices in Japan fell by slightly less than 1 per cent a year. Output still grew, by about 0.9 per cent a year.
Hyperinflation is an outburst of extremely high inflation, usually caused by a government printing money to pay its bills, so money soon becomes nearly worthless.
Can you think of an example?
Zimbabwe's government printed money to pay its bills. In November 2008 inflation reached 79.6 billion per cent, and in 2009 the country abandoned its currency.