Defining Inflation
Economics: IB Diploma, topic 2.3.5
Inflation, Deflation and Disinflation
You need to know the definitions for inflation, deflation and disinflation.
Inflation
- Inflation is defined as a persistent increase in the general price level, over a given period of time.
- Prices are going up.
- Inflation reduces the purchasing power of the Dollar. E.g. $1 will buy you less goods and services in 12 months' time than it will now, if prices in the economy are going up.
Deflation
- Deflation is defined as a persistent decrease in the general price level, over a given period of time.
- Prices are going down.
Disinflation
- Disinflation is a decrease in the rate of increases of prices – it is when inflation falls but remains positive.
- If the inflation rate falls from 5% to 2%, prices are still rising, just at a slower pace.
- Prices are still going up!
Hyperinflation
- An outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy.
Base year
- An arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year.
- For example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year
Test yourself on Defining Inflation
Which of the following refers to falling, but still positive, change in the general price level?
Do prices go up or down in disinflation?