Inflation
Inflation is an increase in the general price level over a period, reducing the purchasing power of money. A price index estimates the movement for a defined basket or coverage; individual prices and households’ experiences can differ. Distinguish the level of prices from the rate at which it changes. A lower positive inflation rate means prices are still rising, usually more slowly, rather than returning to their earlier level.
Worked example
A representative price index rises from 120 to 126 in a year. Inflation is (126 − 120) / 120 = 5%. A person whose nominal income is unchanged can purchase less of that representative basket.
Common mistake
Do not infer general inflation from a single product’s price increase or confuse falling inflation with falling prices. Compare indices with consistent coverage and base.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | BT | Direct | September 2026–June 2027 |
| FIA | FBT | Direct | September 2026–June 2027 |