Inflation is a situation where the average price level of goods and services in the economy rises. The inflation rate is expressed as a percentage over a period of time. The rate of inflation is measured by changes in the Consumer Price Index (CPI). The CPI measures the rate at which a set ‘basket of goods and services’ change in price over a given period of time.
Causes of Inflation
- High demand
- Higher cost of production
- Higher supply of money
- Expectations of inflation
Task: Construct a diagram using words and pictures to show how each of these four factors can cause inflation.
Effects of Inflation
In an period of rising prices (inflation) there are winners and losers.
Those who win include holders of real assets such as gold, people who borrow money and workers who belong to strong trade unions.
Those who lose include people on fixed incomes such as pensioners, banks and other lenders of money, holders of monetary assets such as savings in bank accounts and those workers who are unable to seek wage increases.